Beckman Coulter 10-K 2011
Documents found in this filing:
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
For the Fiscal Year Ended December 31, 2010
Commission File Number 001-10109
BECKMAN COULTER, INC.
(Exact name of registrant as specified in its charter)
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(g) of the Act:
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. x Yes ¨ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ¨ Yes x No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes ¨ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes ¨ No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ¨ Yes x No
Aggregate market value of voting stock held by non-affiliates of the registrant as of June 30, 2010: $4,246,543,815
71,258,612 shares of the registrants Common Stock, $0.10 par value were outstanding as of February 11, 2011
DOCUMENTS INCORPORATED BY REFERENCE
TABLE OF CONTENTS
This Annual Report on Form 10-K (Form 10-K) contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. Many of the forward-looking statements are located in the Managements Discussion and Analysis of Financial Condition and Results of Operations section below. You can identify the forward-looking statements by words such as may, will, might, expect, believe, anticipate, could, would, estimate, continue, pursue, plans, should, likely, might, or the negative thereof or comparable terminology. The forward-looking statements may include information regarding our expectations, goals or intentions regarding the future. Forward-looking statements reflect our current views with respect to future events and involve certain risks and uncertainties. Our actual results may differ materially from those expressed or implied in our forward-looking statements. Factors that could cause results to differ include those discussed in the section below entitled Risk Factors under Part I, Item 1A of this Form 10-K. All forward-looking statements in this Form 10-K are made as of the date of this filing and we assume no obligation to update any forward-looking statement, except as required by law.
Item 1. Business.
From complex DNA sequencing in pioneering research laboratories and high-volume laboratory testing in hospitals to simple single-use diagnostic screening kits used in physicians offices, Beckman Coulter is the worlds largest company devoted solely to biomedical testing. We estimate this market had about $43 billion in worldwide sales in 2010. Tracing our origins to 1935, we are a leading manufacturer and marketer of biomedical testing instrument systems, tests and supplies that simplify, automate and innovate complex laboratory processes. Our inspiration is to improve patient health and reduce the cost of care with products that fall into two basic categories:
Approximately 54% of our revenue is derived outside of the United States. In 2010, about 81% of our total revenue and more than 92% of our gross profit was generated from recurring revenue consisting of consumable supplies (including reagent test kits), service and operating-type lease payments.
Incorporated in Delaware in 1988, we had, as of December 31, 2010, approximately 11,900 employees in approximately 150 facilities on six continents, all dedicated to improving patient health and reducing the cost of care in more than 160 countries in which our products are sold.
Beckman and Coulter combine two of the best known brand names in laboratory science. We adopted our current name in April 1998, changing from Beckman Instruments, Inc. to Beckman Coulter, Inc. (the Company, we, our), to reflect the October 1997 acquisition of Coulter Corporation.
Beckman Instruments, Inc., founded by Dr. Arnold O. Beckman in 1935, entered the laboratory market with the worlds first pH meter, an electronic instrument used to measure pH (acidity or alkalinity). The company became a publicly traded corporation in 1952. In 1968, Beckman Instruments, Inc. expanded its laboratory instrument focus to include healthcare applications in clinical diagnostics. We were acquired by SmithKline Corporation to form SmithKline Beckman Corporation in 1982, operating as a subsidiary of SmithKline Beckman until 1989, when we once again became a separate publicly owned company.
Coulter Corporation was founded by Wallace and Joseph Coulter in 1958 as a private company, remaining under the control of the Coulter family until acquired by Beckman Instruments, Inc. in 1997. Coulter invented the Coulter Principle in 1948 to automatically count and characterize particles and reduced it to practice for the medical field in an instrument used to determine the distribution of red and white cells in blood. This proved to be the foundation of automated hematology.
In 2009 we completed the acquisition of the diagnostic systems portion of Olympus Corporation to extend our Clinical Diagnostics chemistry and automation product offering and enhance our geographic reach and scale.
On February 6, 2011, Beckman Coulter, Danaher Corporation, a Delaware corporation (Danaher), and Djanet Acquisition Corp., a Delaware corporation and an indirect wholly-owned subsidiary of Danaher (Purchaser), entered into a definitive Agreement and Plan of Merger (the Merger Agreement), pursuant to which Danaher, through the Purchaser, agreed to commence an offer (the Offer) to acquire all of the outstanding shares of the Companys common stock, par value $0.10 per share, for $83.50 per share in cash, without interest. The consummation of the transaction is subject to several conditions, including regulatory approvals. Subject to the conditions set forth in the Merger Agreement, and in the Offer, the transaction is expected to be completed in the first half of 2011. For further information on our pending transaction with Danaher, see Note 21, Subsequent Events of the Notes to consolidated financial statements in Item 8 of this Form 10-K, Risk Factors in Item 1A of this Form 10-K and Managements Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of this Form 10-K. All forward-looking statements in this Annual Report on Form 10-K, including those in Managements Discussion and Analysis of Financial Condition and Results of Operations and Risk Factors, do not take into account the impact of, or give any effect to, the pending transaction with Danaher.
We believe the Beckman and Coulter names have become two of the most valuable brand names in biomedical testing for a number of reasons:
Our core strategy is to simplify, automate and innovate biomedical testing processes. Our strategic initiatives for 2011 focus on improving and enhancing quality in all core aspects, including our quality system, our product quality and our service quality. In addition, our strategic initiatives for 2011 include the following:
Customers and Markets
We provide the critical laboratory tools that enable our customers to:
Our customers are the hospitals, laboratories, research centers and physicians offices that are continuously searching for processes and systems to help them perform these types of tests faster, more efficiently and at a lower total cost. To meet these needs, we seek to leverage our investment in research and development (R&D) and to use our core competencies in systems integration, applications, distribution and service to create systems that meet customer and patient requirements.
Most of our instruments are provided to customers under cash sales or operating-type leases (OTLs). We provide OTLs under bundled lease arrangements, in which our customers pay a monthly amount for consumable supplies (including reagent test kits), services and operating-type lease payments for our leased instruments. Our lease arrangements primarily take the form of what are known as reagent rentals where an instrument is placed at a customer location and the customer commits to purchase a minimum volume of reagents annually. We also enter into metered contracts with customers where the instrument is placed at a customer location with a stock of reagents and the customer is billed monthly based on actual reagent usage.
As indicated in the above Comprehensive Product Portfolio chart, Beckman Coulter targets two principal markets: Clinical Diagnostics and Life Science. See Part II Item 7 Managements Discussion and Analysis of Financial Condition and Results of Operations Quality Systems and Quality Matters.
Key facts relating to our Clinical Diagnostics business:
Clinical diagnostics products are used to evaluate and analyze samples made up of body fluids, cells and other substances from patients or in vitro diagnostic or IVD testing. More than 20 billion tests are conducted each year worldwide, with over 82% of the tests considered to be routine tests. The information generated is used to diagnose disease, monitor and guide treatment and therapy, assist in managing chronic disease and assess patient status during hospital admission and discharge. This type of diagnostic testing is increasingly valued as an effective method of reducing health care costs through accurate, early detection of health disorders and enhanced management of treatment, potentially reducing the length of expensive hospital stays and improving patient outcomes. Due to their important role in the diagnosis and treatment of patients, these tests are an integral part of the overall care of patients. In general, clinical diagnostic testing informs over 60-70% of critical health care decisions, while representing less than 3% of overall health care costs.
The major fields that comprise the clinical diagnostics testing industry are clinical chemistry, immunoassay, microbiology, hematology and coagulation, with molecular diagnostics a new and expanding part of the clinical diagnostics testing market. We have significant market positions in the three largest fields: clinical chemistry (33% United States; 25% worldwide), immunoassay (18% United States; 8% worldwide) and hematology (45% United States; 26% worldwide).
Todays clinical laboratories face unique and significant challenges. Newer diagnostic tests demand greater and greater sensitivity and specificity and can be complex and time consuming to perform. At the same time, the laboratory must consistently and rapidly provide high quality results, often 24 hours per day, in a regulated environment that is faced with a shortage of skilled labor. We are the leading provider of progressive automation and clinical information solutions to help laboratories reduce testing turnaround time, reduce the staff required, enhance the quality of testing, reduce overall health care costs and improve patient care.
Key facts relating to our Life Science business:
Life science research is the study of the characteristics, behavior and structure of living organisms and their component systems. The life science testing market is evolving rapidly as a result of advances in genomics, proteomics and cell based testing. With the rough map of the human genome complete, the work that will more directly affect patient care has begun, as researchers start to incorporate this information into specific studies to improve therapeutic efficacy. Our life science testing products play a role in helping researchers understand disease by simplifying and automating key testing processes.
Growth in the life science testing market is driven by funding for government and academic research, pharmaceutical R&D spending and biotechnology investment. Universities and medical research laboratories represent about half of the life science testing market. These customers use human samples to perform clinical research and to conduct basic medical research to further understand the basis of disease, and to characterize disease states. Biotechnology firms and pharmaceutical companies represent the other half of the life science testing market. They rely on our instrument systems to speed the long and detailed process of developing therapeutics. Also, once new therapeutics and vaccines emerge from the research phase, they move into clinical trials to evaluate their effectiveness, where our products are used to monitor clinical trials.
We operate our business on the basis of two operating segments: Clinical Diagnostics and Life Science. Segment revenue and profit information for the last three fiscal years is presented in Note 19 Business Segment Information of the Notes to consolidated financial statements in Item 8 of this Form 10-K. We do not discretely allocate assets to our operating segments, nor does our chief operating decision maker evaluate operating segments using discrete asset information. Within our Clinical Diagnostics segment, we have identified three product areas, each focused on a core product strategy: chemistry and clinical automation, immunoassay and molecular diagnostics and cellular analysis.
Approximately 81% of our revenue and 93% of our gross profit are derived from recurring revenue, comprised of consumable supplies (including reagent test kits), services and operating-type lease payments for our leased instruments. The balance of our revenue is derived from cash instrument sales. Our products and services include:
Consumable supplies (including reagent test kits), service and operating-type lease payments generate significant ongoing revenue, which continues throughout the life of an instrument. We also sell instruments under normal credit terms.
Chemistry and Clinical Automation. Routine chemistry systems use electrochemical detection and chemical reactions with patient samples to detect and quantify substances of diagnostic interest (referred to as analytes) in blood, urine and other body fluids. Commonly performed tests include glucose, cholesterol, triglycerides, electrolytes, proteins and enzymes. We offer tests for more than 100 individual analytes, which account for the vast majority of hospital-based clinical chemistry testing. To save time and reduce the opportunity for errors, systems identify patient samples through barcodes. Automated clinical chemistry systems are designed to be highly reliable and available on short notice, 24 hours a day. We offer systems and workflow solutions for a broad range of customers from small hospitals to the largest reference laboratories.
Chemistry Systems. Our primary clinical chemistry systems are:
Both the UniCel DxC 600 and 800 systems are capable of performing closed tube sampling, which allows the operator to use the tubes that samples are collected in to perform tests. This capability eliminates the tedious and time consuming de-capping and recapping steps while reducing operator exposure to biohazards and repetitive motion injuries. These systems also offer minimal daily maintenance, fast start up and superior STAT testing capability. The AU5800*, 5400, 2700, 680 and 480 systems are amongst the highest throughput and most reliable analyzers on the market today.
Clinical Lab Automation. In recent years, automation has become an increasingly important element in the efficient operation of clinical laboratories as a result of an increasing shortage of skilled laboratory personnel and an increasing focus on total cost savings. We address these needs through our Power Processor, AutoMate 600/800 and AutoMate 1200/2500 systems. Our Power Processor and AutoMate systems allow the laboratory to automate a number of pre-analytical steps, including sample log-in and sorting through bar code technology, centrifugation, aliquoting and cap removal. These systems also sort the prepared samples into discrete racks for further processing on our clinical chemistry, immunoassay, coagulation and hematology systems. The post-analytical capability includes re-sorting for additional testing on other instruments or to a storage position. The Power Processor can be integrated with modules, track systems and analyzers to create comprehensive laboratory automation that handles virtually all of the laboratorys preanalytical and post analytical processes. The Automate 1200/2500 systems automate the pre- and post-analytical sample handling steps in very to ultra-high volume laboratories.
Point of Care Testing. Point of care testing products are used in physicians office laboratories, clinics, hospitals and other medical settings. These products include a range of rapid diagnostic test kits as well as immunoassay and hematology instruments that give physicians immediate information to help them manage patients. The Hemoccult and Hemoccult SENSA tests are the industry standard in fecal occult blood testing and are used as aids in screening for gastrointestinal disease and colorectal cancer.
* AU 5800 cleared for sale only in Japan: Navios not cleared for sale in the United States
Immunohematology. Our immunohematology products include the PK 7300 fully automated analyzers, blood grouping reagents and CMV and Syphilis screening tests. These products are sold to blood donor testing centers. The PK 7300 analyzer includes features that enable customers to comply with donor testing regulations around the globe. PK systems are the highest throughput and among the most reliable products in the donor testing market. The majority of donor blood units collected worldwide are tested on a PK system.
Immunoassay and Molecular Diagnostics.
Immunoassay Products. Immunoassay systems also detect and quantify chemical substances of diagnostic interest in blood, urine or other body fluids. Commonly performed immunoassay tests assess thyroid function, screen and monitor for cancer and cardiac risk and provide important information in fertility and reproductive testing. Other tests are used to monitor critical factors associated with anemia, blood viruses and infectious disease.
We offer more than 60 automated immunoassay test kits targeted to a broad range of disease states, from heart disease (troponin) to reproductive testing (Inhibin A). Our most significant products are the Access family of immunoassay systems, which includes:
Most of the systems use identical reagents, which can facilitate improved work flow and flexibility and can simplify inventory management for the laboratory.
Molecular Diagnostics Products. Molecular diagnostics is an emerging and promising field that includes testing for infectious diseases, genetic diseases and disorders, human cancers and pharmacogenics. As knowledge of the genome and its functioning continues to expand, new applications are being developed and, in some cases, are being used today as diagnostic tools as well as in genetic disease susceptibility testing. We are developing a sample-to-result system for molecular diagnostics, the UniCel DxN, which we believe will meet the needs of routine, moderately complex clinical laboratories for an automated, fully integrated molecular diagnostics test system. We expect to commercialize the UniCel DxN in 2012.
Chemistry/Immunoassay Work Cells. Work cells, the integration of chemistry and immunoassay, is one of the fastest growing areas in the clinical diagnostics laboratory testing. We offer five of the most capable work cells in the industry, from the mid-volume UniCel DxC 600i to the high-volume DxC 880i.
Beckman Coulter work cells offer our entire menu of more than 150 chemistry and immunoassay tests from a single point of sample entry. And they all feature our exclusive closed-tube sampling, which helps improve efficiency and reduce the potential for errors. Importantly, the entire fielded base of UniCel DxC 600 and 800 chemistry systems can be upgraded to work cells.
Hematology Products. Our blood cell systems use principles of physics, optics, electronics and chemistry to separate cells of diagnostic interest and then quantify and characterize them. These systems allow clinicians to study formed elements in blood, such as red and white blood cells and platelets. The most common laboratory diagnostic test is a CBC or complete blood count, which provides information on from 8 to 23 different blood cell parameters. Our hematology product line is structured to address the differing requirements of high, medium and low volume laboratories and includes:
Flow Cytometry Products. Flow cytometry is used in numerous applications in basic research, clinical research, therapeutics and clinical diagnostics testing. Flow cytometers rapidly sort, identify, categorize and characterize multiple types of cells in suspension. Flow cytometers allow analysis of cell types including specific cell characteristics such as phenotype, thereby allowing researchers to analyze specific cell populations. This analysis can be performed beyond blood to include bone marrow, tumors and other cellular samples. Our line of flow cytometry systems includes:
Coagulation Products. Coagulation systems rely on clotting, chromogenic and immunologic technologies to provide the detailed information that clinicians require to diagnose bleeding and clotting disorders and to monitor anticoagulant therapy. We offer a range of hemostasis systems and reagents as the distributor of the Instrumentation Laboratory ACL line of hemostasis systems and its Instrumentation Laboratory and Hemoliance brands of reagents in North America, China and certain other markets. We believe these products give a laboratory access to the broadest automated hemostasis menu in the industry, from routine screening tests such as the activated partial thromboplastin time and prothrombin time to a wide range of esoteric tests.
Life Science Automation. Our products are used in many parts of the drug discovery and development process as well as automated sample preparation for genomic and cellular analysis. Important applications for these automation products include sample preparation for high throughput genomic analysis such as genotyping. The analysis of massive amounts of genetic information requires automation of sample preparation to meet throughput requirements. Our automation systems are used in the process of handling live cells in a high throughput mode as biologic drugs are a critical part of the drug development pipeline. Other drug development applications that require samples to be processed in an automated or high-throughput mode include target identification, secondary screening and pre-clinical testing.
Centrifugation. Centrifuges separate liquid samples based on the density of the components. Centrifugal samples are spun at up to 150,000 revolutions per minute to create forces that exceed 1,000,000 times that of gravity. These forces result in the nondestructive separation of proteins, DNA, viruses and other cellular components while retaining their biological activity. Our centrifuges are routinely used in cellular, genomic and proteomic research as well as in vaccine development and production because they enable very efficient sample separation processes.
Capillary Electrophoresis. This microscale technology provides the separation, quantitation and characterization of charged/polar molecules like ions, drugs, metabolites, proteins, glycoproteins and nucleic acids in a fast and efficient way, reducing analysis cost, sample consumption and time to answer. We have developed this core separation technology into analytical solutions for industrial, food safety, academic, medical and government laboratories. Our CE based solutions include:
Nucleic Acid Purification. Our wholly owned subsidiary, Beckman Coulter Genomics, Inc., is a leading provider of nucleic acid purification products in the biomedical research and clinical diagnostic market. Its patented Solid Phase Reversible Immobilization (SPRI) technology provides state-of-the-art results for the isolation and purification of RNA and DNA. This technology may be integrated with any automated liquid handling systems, including Beckmans Biomek, to provide customers with an automated solution for nucleic acid purification. Leveraging our rich genomic experience and proprietary chemistry knowledge, we offer a comprehensive set of Genomic Services including PCR, NextGen Sequencing, Genotyping, Genexpression and wide array of biologic testing. These genomic services provide critical information to our customer in support of scientific advancement from benchtop discovery through phase IV clinical trial support. We are incorporating the SPRI technology into other product lines to further expand the overall use of this technology. We continue to expand our genomic services testing business offering comprehensive services for biotechnology and pharmaceutical companies.
To compete effectively in our markets, we must invest in R&D and establish the technical infrastructure needed to develop complex systems, integrating engineering, chemical, biological and computer sciences. In addition, an extensive distribution infrastructure with highly qualified personnel to perform sales, service, customer training and technical product support is needed. Also, in some cases, authorization to market Clinical Diagnostics products must be obtained from regulatory authorities in the United States and other countries. We consider our reputation for service responsiveness and our sales and service network within our market segments to be important competitive assets.
Nevertheless, we encounter significant competition from many domestic and international manufacturers, with many of these companies participating in one or more parts of each of our market segments. Some of these competitors are divisions or subsidiaries of corporations with substantial resources. In addition, we compete with several companies that offer reagents, consumables and service for laboratory instruments that are manufactured by us and others.
Research and Development
We must continue to introduce new instrument and reagent technologies and remain at the forefront in helping customers advance medical science, improve patient outcomes and reduce healthcare costs to continue to grow, gain market share and remain competitive. Our strategy is to develop, acquire and defend intellectual property and invest in R&D.
Our new products originate from four sources:
Development programs focus on production of new generations of existing product lines as well as new product categories not currently offered. Areas of pursuit include innovative approaches to near patient testing, molecular diagnostics, cell characterization and sorting, immunoassay, molecular biology, advanced electrophoresis technologies and automated sample processing and information technologies. Our R&D teams are skilled in a variety of scientific, engineering and computer science disciplines, in addition to a broad range of biological and chemical sciences. Our R&D expenditures were $268.6 million in 2010, $266.4 million in 2009 and $280.1 million in 2008. Our expenditures vary due primarily to charges incurred in certain periods to acquire licenses for products in development that have no alternative future use and the proportion of technical talent that is allocated to support current products.
Sales and Service
We have sales in more than 160 countries. Most of our products are distributed by our own marketing, service and sales organizations in major markets. We also employ independent distributors to serve those markets that are more efficiently reached through such channels. Our sales representatives are technically educated and trained in the operation and application of our products. The sales force is supported by a staff of scientists and technical specialists in each product line and in each major scientific discipline served by our products. These individuals enable us to provide the level of immediate after-sales service and technical support that is
critical to customer satisfaction. This includes capabilities to provide technical support by phone and to deliver parts or have a service engineer on site. To have such capabilities on a global basis requires a major investment in personnel, facilities and other resources. Our installed base of more than 275,000 major instruments makes the required service and support infrastructure financially viable.
Patents and Trademarks
Patents and other proprietary rights are essential to our business. We rely on trademarks, copyrights, trade secrets, know-how and confidentiality agreements to develop, maintain and strengthen our competitive position. We own a large number of patents and trademarks throughout the world and have also entered into license arrangements of various third-party patents and technologies.
Products manufactured by us are sold primarily under our own trademarks and trade names. Our primary trademark and trade name is Beckman Coulter alone or in association with our logo. We vigorously protect our primary trademark, which is used on or in association with our worldwide product offerings. We believe that the name Beckman Coulter is recognized in laboratories worldwide as a premier source of biomedical instrumentation and products. We also own and use secondary trademarks with various products for product differentiation purposes. Coulter is used as a secondary mark and source identifier with some of our products.
We protect our products and technology through patents on a worldwide basis, balancing the cost of such protection against obtaining the greatest value. We currently maintain a worldwide patent portfolio of approximately 3,160 active patents and pending applications for patents. Our entire portfolio of patents and applications is distributed between our Clinical Diagnostics and Life Science products and the chemistries and kits used with them.
We also protect certain unpatented confidential and proprietary information important to our business as trade secrets. We maintain certain details about our processes, products and technology as trade secrets and generally require employees, consultants, parties to collaboration agreements and other business partners to enter into confidentiality agreements.
We recognize the need to promote the enforcement of our patents and trademarks and continue to take commercially reasonable steps to enforce our patents and trademarks around the world against potential infringers. We operate in an industry susceptible to significant patent litigation. At any given time, we generally are involved as both a plaintiff and defendant in several patent infringement and other intellectual-property related actions. Such litigation can result in significant royalty or other payments or result in injunctions that can prevent the sale of products.
Our products and operations are subject to a number of federal, state, local and foreign laws and regulations. Virtually all of our Clinical Diagnostics products and some of our Life Science products are classified as medical devices under the United States Food, Drug and Cosmetic Act (the FDCA). The FDCA requires these products, when sold in the United States, to be safe and effective for their intended use and to comply with regulations administered by the United States Food & Drug Administration (FDA). See Part II Item 7 Managements Discussion and Analysis of Financial Condition and Results of Operations Quality Systems and Quality Matters.
These regulatory requirements include:
The FDCA authorizes FDA to bring legal action to enforce the FDCA and to address violations. Legal remedies available to FDA for violations of the FDCA include criminal prosecution, seizure of violative products, injunctions against the distribution of the products and assessment of civil penalties. FDA normally provides companies with an opportunity to correct alleged violations before taking legal action.
The European Union also has adopted requirements that affect our products. These requirements include establishing standards that address creating a certified quality system as well as a number of directives that address specific product areas. The most significant of these directives is the In Vitro Diagnostic Medical Device Directive (IVDD), which includes:
Our major manufacturing operations and development centers and many of our international sales and service subsidiaries have been certified as complying with the European Unions quality system requirements. We also have programs in place that address the various aspects of the IVDD.
A number of other countries, including Australia, Brazil, Canada, China and Japan, have adopted or are in the process of adopting standards for medical devices sold in those countries. Many of these standards are loosely patterned after those adopted by the European Union, but with elements unique to each country. We routinely monitor any new developments and address compliance with the various country requirements as new standards are adopted.
United States and foreign regulations governing reimbursement for diagnostic laboratory testing services may directly or indirectly affect our products design and potential market. In many cases, the acceptance of new technologies and tests in the marketplace are directly related to the availability of reimbursement. Health care reform efforts in the United States and other countries also may further alter the methods and financial aspects of doing business in the health care field. We closely follow these developments, so we may position ourselves to respond to them.
In addition to the foregoing, we are subject to other federal, state, local and foreign governmental regulation, including, but not limited to, the Federal Anti-Kickback Statute, the False Claims Act, the U.S. Foreign Corrupt Practices Act, other similar anti-fraud, anti-corruption, or anti-abuse regulation, labor laws, import and export laws, the Health Insurance Portability and Accountability Act of 1996 (HIPAA), comparable state privacy laws and international privacy and data protection laws. Failure to comply with any of these laws or regulations that are applicable to us could potentially subject us to significant civil and/or criminal penalties and have a material and adverse effect on our business and results of operations.
Specifically, the Federal Anti-Kickback Statute prohibits, among other things, persons from knowingly and willfully soliciting, receiving, offering or paying remuneration, directly or indirectly, in exchange for or to induce either the referral of an individual for, or the purchase, order or recommendation of, any good or service for which payment may be made under federal health care programs such as the Medicare and Medicaid programs. Federal false claims laws prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid, or other third-party payors that are false or fraudulent. The Patient Protection and Affordable Care Act of 2010 (PPACA) amends the intent requirement of the Federal Anti-Kickback and criminal health care fraud statutes, providing that a person or entity no longer needs to have actual knowledge of the statute or specific intent in order to be found in violation. In addition, the PPACA provides that the government may assert that a claim including items or services resulting from a violation of the Federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the false claims statutes. Moreover, HIPAA creates federal criminal laws that prohibit executing a scheme to defraud any health care benefit program or making false statements relating to health care matters. State law equivalents of each of the above federal laws may additionally apply to items or services reimbursed by any third-party payor, including commercial insurers. If our operations are found to be in violation of any of these laws, we may be subject to penalties, including civil and criminal penalties, damages, fines, exclusion from governmental health care programs, and the curtailment or restructuring of our operations, any of which could adversely affect our ability to operate our business and our financial results.
The Foreign Corrupt Practices Act (the FCPA) prohibits U.S. companies and their officers, directors, employees, shareholders acting on their behalf and agents from offering, promising, authorizing or paying anything of value to foreign public officials for the purpose of obtaining or retaining business or otherwise obtaining favorable treatment. Companies must also maintain records that fairly and accurately reflect transactions and maintain internal accounting controls. If we are found to have violated the FCPA, we may face sanctions including fines, criminal penalties, disgorgement of profits and suspension or debarment of our ability to contract with government agencies or receive export licenses, as well as suffer a loss of reputation or business opportunity in the market. We are subject to similar anti-corruption laws in countries around the world in which we conduct our business.
We are also subject to various privacy and security regulations, including but not limited to the Health Insurance Portability and Accountability Act of 1996 (HIPAA), as amended by the Health Information Technology for Economic and Clinical Health Act of 2009 (HITECH). HIPAA restricts the use and disclosure of personal health information and mandates, among other things, the adoption of standards relating to the privacy and security of individually identifiable health information, which require the adoption of administrative, physical and technical safeguards to protect such information. Moreover, HITECH requires us to report certain breaches of unsecured, individually identifiable health information to the extent such breaches occur. In addition, many states have enacted comparable laws addressing the privacy and security of health information, some of which are more stringent than and are not preempted by HIPAA. Failure to comply with these laws can result in the imposition of significant civil and criminal penalties.
We are subject to federal, state and local environmental laws and regulations both in the United States and other countries. Although we continue to make expenditures to comply with environmental laws and regulations, we do not anticipate that these expenditures will have a material impact on our operations or financial position. We believe our operations comply in all material respects with applicable federal, state and local environmental laws and regulations.
Although few of our products are directly regulated by environmental laws, they may be impacted by environmental laws that have broad general scope. For example, a growing number of jurisdictions have adopted laws banning the use of certain chemicals and materials in electronic components as well as requiring those components be recycled rather than discarded. Similarly, a number of customers are located in areas that either ban outright or limit the use of products that contain chemicals, such as mercury, lead and other heavy metals, cyanides and certain organic compounds. In some cases, manufacturers of chemicals that we use as raw materials have withdrawn those materials from the market due to perceived environmental issues. We have adopted a number of programs to address these various requirements and, in a few cases, have been required to redesign products to address them.
We began conducting environmental studies at our Fullerton site in 2008 in connection with the closure of our Fullerton, California site. The data generated by these studies suggests that soils under and around several of the buildings contain chemicals previously used in operations at the facility. Some of these chemicals also have been found in groundwater underlying the site. Studies to determine the source and extent of these chemicals are underway. We notified the California State Department of Toxic Substances Control of the presence of these chemicals at the site and expect the agency to oversee determination of any remediation requirements. We recorded a liability of $19.0 million representing our best estimate of the future expenditures for investigation and remediation at the site. The ultimate costs incurred could range from $10.0 million to $30.0 million. Our estimates are based upon the results of our investigation to date and comparison to our prior experience with environmental remediation at other sites. Additional activities not contemplated at this time could be required and the actual costs could differ materially from the amount we have recorded as a liability or our estimated range. Through December 31, 2010 we have spent $2.0 million.
We also remain subject to costs of remediating sites where we formerly conducted operations or where we disposed of wastes. For most of these sites, we are one of a large number of parties required to contribute toward remediation of the site. To address these contingent environmental costs we establish accruals when the costs are probable and can be reasonably estimated. We believe that, based on current information and regulatory requirements, the accruals established for environmental expenditures are adequate. Based on current knowledge, to the extent that additional costs may be incurred that exceed the accruals, the amounts are not expected to have a material adverse effect on our operations, financial condition or liquidity, although no assurance can be given in this regard.
As of December 31, 2010, we and our subsidiaries had approximately 11,900 employees worldwide. We believe relations with our employees are good.
Financial Information About Geographic Areas
Geographic data information is presented in Note 19 Business Segment Information of the Notes to consolidated financial statements in Item 8 of this Form 10-K.
We file reports with the SEC, including annual reports on Forms 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934, as amended (the Exchange Act). The public may read and copy any materials we file with the SEC at the SECs Public Reference Room at 100 F Street, NW, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy, and information statements, and other information regarding issuers that file electronically with the SEC. The address of that site is www.sec.gov.
Copies of our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are available on our website, www.beckmancoulter.com , and may be obtained free of charge as soon as reasonably practicable after they are electronically filed with, or furnished to, the SEC. In addition, paper copies of these documents may be obtained free of charge by writing to us at Beckman Coulter, Inc., Office of Investor Relations, 250 S. Kraemer Boulevard, Brea, California 92821.
Item 1A. Risk Factors.
We face significant competition, and our failure to compete effectively could adversely affect our sales and results of operations.
We face significant competition from many domestic and international manufacturers, with many of these companies participating in one or more parts of each of our markets. Some of these competitors are divisions or subsidiaries of corporations with substantial resources. We also compete with several companies that offer reagents, supplies and service for laboratory instruments that are manufactured by us or others. Our sales and results of operations may be adversely affected by loss of market share through aggressive competition, our customers perception of the comparative quality of our competitors products, the rate at which new products are introduced by us and our competitors and the extent to which new products displace existing technologies and competitive pricing especially in areas where currency has an effect.
Soft global economic conditions resulting in continued lower healthcare utilization rates and reimbursement rates would adversely affect our sales and results of operations.
Our customers and our business have been negatively impacted by a material softness in global economic conditions, including high unemployment rates and budgeting constraints by government entities. Such economic conditions may continue, and we are unable to predict the strength and duration of any economic recovery. Continuing softness in economic conditions or slow economic recovery may adversely impact our customers and our business resulting in reduced healthcare utilization rates by patients, reduced reimbursement rates by government agencies to our customers, reduced demand for our products, and increased price pressure for our products and services.
We are subject to various federal, state, local and foreign regulations, and compliance with these laws or any new laws or regulations could cause us to incur substantial costs and adversely affect our business and results of operations.
Our products and operations are subject to a number of federal, state, local and foreign laws and regulations. A determination that our products or operations are not in compliance with these laws and regulations could subject us to civil and criminal penalties, prevent us from manufacturing or selling certain of our products and cause us to incur substantial costs in order to be in compliance. To varying degrees, compliance with these laws and regulations may:
Our compliance costs include addressing our ongoing responsibilities under FDA regulations that apply to our products both before and after they are cleared or approved for distribution. Any material delays in obtaining clearance for distribution of our new or modified products could have a material adverse effect on our results of operations. Furthermore, if FDA were to conclude that any of our products are ineffective or pose an unreasonable health risk even after obtaining clearance for distribution, or if we are not in compliance with applicable regulations, FDA could:
For information regarding our quality systems and product quality matters, see Part II-Item 7 Managements Discussion and Analysis of Financial Condition and Results of Operations Quality Systems and Quality Matters.
As we have previously disclosed in other filings, we are currently working to obtain updated product 510(k) clearances for our troponin test kits available on our Dxl and Access immunoassay instruments. Our ability to obtain in a timely manner any necessary 510(k) clearances for troponin or any of our other applicable products will depend on many factors, including our ability to reach agreement with FDA on clinical trial protocols, identify and locate qualified test sites, recruit patients meeting the necessary criteria, and obtain the necessary trial results. Therefore, we can provide no assurance that the necessary clearance or approvals will be obtained within the timeframe anticipated, if at all.
Furthermore, the process for 510(k) clearances for any of our new or modified products could be lengthy and costly, could change over time and may require the withdrawal of products from the market until such clearances are obtained as well as the imposition of recalls or the initiation of enforcement actions against us by FDA, including warning letters, fines, seizures, consent orders or injunctions. The loss of revenue from our products that are the subject of FDA inquiries could be more than we estimate and our foreign sales could also be adversely affected. These issues could cause us to lose customers and there could be unanticipated costs associated with these matters or other discussions with FDA and similar regulatory agencies in other jurisdictions.
Given the issues pertaining to our troponin test kits as well as our recent recalls relating to sodium and glucose testing on our DxC chemistry systems, we are continuing to evaluate our internal processes and procedures regarding our quality systems and product quality matters. It is possible that more of our products could be affected and the actions with respect to those products could adversely affect our business and operating results. Our internal review of our products could reveal failures in our processes and systems which could be significant.
In addition, foreign governmental regulations have become more common and stringent. We may become subject to more rigorous regulation by foreign governmental authorities in the future. Penalties for noncompliance with foreign regulation could be severe, including revocation or suspension of the ability to sell products in that country and criminal sanctions. An adverse regulatory action in the U.S. or in other countries could restrict us from effectively marketing and selling our products.
Recent and future healthcare reform changes may have a material adverse effect on our operating results.
Changes to existing laws or regulations, including the effect of potential health care reforms, also could limit our ability to manufacture or sell our products, reduce funding for government and academic research and cause us to incur substantial compliance costs and increase our tax liabilities.
The recently enacted Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act (collectively, the PPACA), institutes substantial changes to the way health care is financed by both governmental and private insurers and contains several provisions that could have a material impact on our business. With limited exceptions, the PPACA, among other things, imposes a 2.3% deductible excise tax on any entity that manufactures or imports medical devices offered for sale in the United States beginning in 2013. The PPACA also imposes new reporting and disclosure requirements on device manufacturers for any transfer of value made or distributed to prescribers and other healthcare providers, effective March 30, 2013. Such information will be made publicly available in a searchable format beginning September 30, 2013. In addition, device manufacturers will also be required to report and disclose any investment interests held by physicians and their immediate family members during the preceding calendar year. Failure to submit required information may result in civil monetary penalties of up to an aggregate of $150,000 per year (and up to an aggregate of $1 million per year for knowing failures), for all payments, transfers of value or ownership or investment interests not reported in an annual submission. We cannot predict at this time the full impact of the PPACA on our business. Nor can we predict whether or the extent to which other proposed changes will be adopted, if any, or how these or future changes will affect the demand for our services. The PPACA as well as other health care reform measures that may be adopted in the future could have a material adverse effect on us and our industry.
We must deliver products and services that meet customers and patients needs and expectations or our business and results of operations will be adversely impacted.
Our ability to retain customers, attract new customers, grow our business and enhance our brand depends on our success in delivering products and services that meet our customers needs and expectations. If we are unable to deliver reliable products in a timely and prompt manner, promptly respond to and address quality issues, provide expected levels of customer service, develop and maintain cross-functional communication within our company, and comply with applicable regulations and rules, our ability to deliver products that meet our customers and patients needs and expectations, our competitive position, our branding, and our
results of operations may be adversely and materially affected. Furthermore, any improvement in the perception of the quality of our competitors products or services relative to the quality of our product and services could adversely and materially affect our ability to retain our customers and attract new customers.
If we do not develop and introduce successful new products in a timely manner our competitive position and our results of operations will be negatively impacted.
The process of developing new products is complex, costly and uncertain, and requires us to successfully integrate hardware, computer science biological and chemistry components. Furthermore, developing and manufacturing new products require us to anticipate customers needs and requirements and emerging technology trends accurately. In addition, our ability to introduce new products may be affected by patents and other intellectual property rights of others, protection of our intellectual property from others, integration of acquired technologies or products, results of our clinical studies, sufficient allocation of resources, and receipt of regulatory approvals or clearance. Any delay in the successful development, production, marketing or distribution of a new product in a timely manner could adversely and materially affect our competitive position, our branding, and our results of operations. Furthermore, we have been realigning and allocating resources to focus on improving our quality system, our product quality and our service quality, including resources that may otherwise have been dedicated to research and development for new products. Such allocation of our resources may negatively affect the timing for the release of new products.
We are subject to laws regulating fraud and abuse in the healthcare industry and any failure to comply with such laws could materially and adversely affect our business and our results of operations.
We are subject to various federal, state and local laws regulating fraud and abuse in the relevant industries, including the healthcare industry, such as anti-kickback and false claims laws. The Federal Anti-Kickback Statute prohibits persons from knowingly and willfully soliciting, offering, receiving or providing remuneration, directly or indirectly, in exchange for or to induce either the referral of an individual, or the furnishing or arranging for a good or service, for which payment may be made under a federal health care program, such as Medicare or Medicaid. The definition of remuneration has been broadly interpreted to include anything of value, including, for example, gifts, discounts, the furnishing of free supplies, equipment or services, credit arrangements, payments of cash and waivers of payment. The recently enacted PPACA, among other things, amends the intent requirement of the federal anti-kickback and criminal health care fraud statutes. Arguably, a person or entity no longer needs to have actual knowledge of this statute or specific intent to violate it. In addition, the PPACA provides that the government may assert that a claim including items or services resulting from a violation of the federal anti-kickback statute constitutes a false or fraudulent claim for purposes of the false claims statutes. Although there are a number of statutory exemptions and regulatory safe harbors protecting certain common activities from prosecution, the exemptions and safe harbors are drawn narrowly, and practices that involve remuneration could be subject to scrutiny if they do not qualify for an exemption or safe harbor. Many states have also adopted laws similar to the Anti-Kickback Statute. Some of these state prohibitions apply to referral of patients for health care items or services reimbursed by any payor, not only the Medicare and Medicaid programs, and do not contain identical safe harbors. In addition, some states, such as California, Massachusetts and Vermont, mandate implementation of comprehensive compliance programs to ensure compliance with these laws.
The Health Insurance Portability and Accountability Act of 1996 also created two new federal crimes: health care fraud and false statements relating to health care matters. The health care fraud statute prohibits knowingly and willfully executing a scheme to defraud any health care benefit program, including private payors. The false statements statute prohibits knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement in connection with the delivery of or payment for health care benefits, items or services.
Another development affecting the health care industry is the increased use of the federal civil False Claims Act and, in particular, actions brought pursuant to the False Claims Acts whistleblower or qui tam provisions. The False Claims Act imposes liability on any person or entity that, among other things, knowingly presents, or causes to be presented, a false or fraudulent claim for payment by a federal health care program. The qui tam provisions of the False Claims Act allow a private individual to bring actions on behalf of the federal government alleging that the defendant has submitted a false claim to the federal government, and to share in any monetary recovery. In addition, various states have enacted false claim laws analogous to the False Claims Act. Our future activities relating to the sale and marketing of our products may be subject to scrutiny under these laws. We are unable to predict whether we would be subject to actions under the False Claims Act or a similar state law, or the impact of such actions. However, the costs of defending any such claims, as well as any sanctions imposed, could significantly adversely affect our results of operations.
Compliance with the requirements of federal and state laws pertaining to the privacy and security of health information may be time consuming, difficult and costly, and if we are unable to or fail to comply with such laws, our financial condition, results of operations and cash flows may be adversely affected.
We are subject to various privacy and security regulations, including but not limited to the Health Insurance Portability and Accountability Act of 1996 (HIPAA), as amended by the Health Information Technology for Economic and Clinical Health Act of 2009 (HITECH). HIPAA mandates, among other things, the adoption of standards relating to the privacy and security of individually identifiable health information, which require the adoption of administrative, physical and technical safeguards to protect such information. Moreover, HITECH requires us to report certain breaches of unsecured, individually identifiable health information to the extent such breaches occur. In addition, many states have enacted comparable laws addressing the privacy and security of health information, some of which are more stringent than and are not preempted by HIPAA. Failure to comply with these laws can result in the imposition of significant civil and criminal penalties. The costs of compliance with these laws and the potential liability associated with the failure to comply with these laws could adversely affect our financial condition, results of operations and cash flows.
Our business could be adversely affected if we do not prevail in present or future third party intellectual property litigation adverse to our products or if our patents or other intellectual property rights are challenged, invalidated, circumvented or expire.
We cannot assure you that our products will be free of intellectual property rights of others or that a court will not find such products to infringe third party rights. Patent disputes are frequent, costly and may preclude or delay product commercialization. We may have to pay significant licensing fees to obtain access to third party intellectual property rights to make and sell current products or to introduce new products and cannot guarantee that such licenses will be available on terms acceptable to us, or at all. We also cannot assure you that our issued patents will include claims sufficiently broad to prevent competitors from developing competing products or that pending patent applications will result in issued patents. Obtaining and maintaining patents is an iterative process with patent offices worldwide. Our patents may not protect us against competitors with similar products or technologies, because competing products or technologies may not infringe our patents. The enforcement of our issued patents requires the filing and prosecution of legal actions in countries around the world, and we cannot assure you that we will prevail in such actions.
We rely on certain suppliers and manufacturers for raw materials, products and services, and fluctuations in the availability and price of such materials, products and services may interfere with our ability to meet our customers needs.
Difficulty in obtaining raw materials and components for our products, especially in the rapidly evolving electronic components market, could affect our ability to achieve anticipated production levels. For some of our products we are dependent on a sole source or a small number of suppliers of finished products and of critical raw materials and components and our ability to obtain, enter into and maintain contracts with these suppliers. We cannot assure you that we will be able to obtain, enter into or maintain all such contracts in the future. On occasion, we have been forced to redesign portions of products when a supplier of critical raw materials or components terminated its contract or no longer made the materials or components available. If we are unable to achieve anticipated production levels and meet our customers needs, our operating results could be adversely affected. In addition, our results of operations may be significantly impacted by unanticipated increases in the costs of labor, raw materials, freight, utilities and other items needed to develop, manufacture and maintain our products and operate our business. Suppliers also may deliver components or materials that do not meet specifications preventing us from manufacturing products that meet our design specifications or customer requirements.
Consolidation of our customer base and the formation of group purchasing organizations could adversely affect our sales and results of operations.
Consolidation among health care providers and the formation of buying groups and, with respect to our international operations, government-sponsored tendering processes have put pressure on pricing and sales of our products, and in some instances, required payment of fees to group purchasing organizations or providing lower pricing in the tendering process. Our success in these areas depends partly on our ability to enter into contracts with integrated health networks and group purchasing organizations. If we are unable to enter into contracts with these group purchasing organizations and integrated health networks on terms acceptable to us or fail to have our pricing terms accepted in the tendering process, our sales and results of operations may be adversely affected. Even if we are able to enter into these contracts, or have our pricing terms accepted in the tendering process, they may be on terms that negatively affect our current or future profitability.
Reductions in government funding and reimbursement to our customers could negatively impact our sales and results of operations.
Many of our customers rely on government funding and on prompt and full reimbursement by Medicare and equivalent programs outside of the United States. In addition, our sales are affected by factors such as:
A reduction in the amount or types of government funding or reimbursement that affect our customers, as well as the unavailability of capital to our Clinical Diagnostics and Life Science customers, could have a negative impact on our sales. Global economic uncertainty can result in lower levels of government funding or reimbursement.
Our international operations expose us to foreign currency exchange fluctuations.
We operate a substantial portion of our business outside of the United States and are therefore exposed to fluctuations in the exchange rate between the U.S. dollar and the currencies in which our foreign subsidiaries and dealers receive revenue and pay expenses. With a strengthening U.S. dollar, this exposure includes a negative impact on margins on sales of our products in foreign countries that are manufactured in the United States. We may enter into currency hedging arrangements in an effort to stabilize certain of these fluctuations. There are certain costs associated with these currency hedging arrangements, and we cannot be certain that such arrangements will have the full intended effect. Our currency exposures may not be hedged exposing us to losses on our assets and cash flows denominated in these currencies. Our dealers may experience slower payment terms from their customers or have trouble paying for the purchases due to a stronger U.S. dollar. Further, we are exposed to counter party risks in the event that our counterparties do not perform in accordance with the contract terms.
Global market, economic and political conditions and natural disasters may adversely affect our operations and performance.
Our operations and performance depend significantly on worldwide market economic and political conditions and their impact on levels of certain customer spending, which may deteriorate significantly in many countries and regions, including the United States, particularly in light of the current worldwide market disruptions and economic downturn, and may remain depressed for the foreseeable future. For example, global political conditions and general economic conditions in foreign countries where we do significant business, such as the United States, France, Germany, India, Japan and China, could negatively impact our sales. These disruptions could adversely affect our customers ability to pay for products or purchase additional products. These conditions also may adversely affect our suppliers, which could cause disruptions in our ability to produce our products. In addition, economic and market volatility and disruption, such as the current worldwide market disruptions and economic downturn, may adversely affect the cost and availability of credit. Concern about market stability and counterparty strength may lead lenders and institutional investors to reduce or cease to provide funding to borrowers. Natural disasters could adversely affect our customers and our ability to manufacture and deliver products. Any of these market, economic, political factors, acts of terrorism, or natural disasters could have a material adverse effect on demand for our products, our ability to manufacture, support and distribute products, our financial condition and operating results, and the terms of equity and debt capital and our ability to issue them.
We are subject to risks associated with our global operations.
We are a global business that generates approximately 54% of our total revenue outside the United States. This subjects us to a number of risks, including international economic, political and labor conditions, tax laws (including U.S. taxes on foreign subsidiaries), increased financial accounting and reporting burdens and complexities, unexpected changes in, or impositions of, legislative or regulatory requirements, failure of laws to protect our intellectual property rights adequately, inadequate local infrastructure and difficulties in managing and staffing international operations, delays resulting from difficulty in obtaining export licenses for certain technology, tariffs, quotas and other trade barriers and restrictions, transportation delays, operating in locations with a higher incidence of corruption and fraudulent business practices; and other factors beyond our control, including terrorism, war, natural disasters and diseases.
By conducting a global business in the United States and many other countries, we must continually interpret, and then comply with, the income tax rules and regulations in these countries. Any failure to comply with, or to interpret correctly, such applicable rules and regulations could subject us to civil or criminal liabilities. In particular different interpretations of income tax rules and regulations as applied to our facts by applicable tax authorities throughout the world could result, either historically or prospectively, in adverse impacts to our worldwide effective income tax rates and income tax liabilities. Other factors that could impact our worldwide effective tax rates and income tax liabilities are:
Moreover, as a global company, we are subject to varied and complex laws, regulations and customs domestically and internationally. These laws and regulations relate to a number of aspects of our business, including trade protection, import and export control, data and transaction processing security, records management, gift policies, employment and labor relations laws, and other
regulatory requirements affecting our foreign operations. The application of these laws and regulations to our business is often unclear and may at times conflict. Compliance with these laws and regulations may involve significant costs or require changes in our business practices that result in reduced revenue and profitability. Non-compliance could also result in fines, damages, criminal sanctions against us, our officers, or our employees, prohibitions on the conduct of our business, and damage to our reputation. We incur additional legal compliance costs associated with our global operations and could become subject to legal penalties in foreign countries if we do not comply with local laws and regulations, which may be substantially different from those in the United States. In many foreign countries, particularly in those with developing economies, it may be common to engage in business practices that are prohibited by U.S. regulations applicable to us such as the Foreign Corrupt Practices Act. Although we implement policies and procedures designed to ensure compliance with these laws, there can be no assurance that all of our employees, contractors and agents, as well as those companies to which we outsource certain aspects of our business operations, including those based in foreign countries where practices which violate such U.S. laws may be customary, will comply with our internal policies. Any such non-compliance, even if prohibited by our internal policies, could have an adverse effect on our business and result in significant fines or penalties.
Our investment of our pension plan assets in marketable securities is significant and is subject to market, interest rate and credit risk that may reduce its value and increase our liabilities.
Within the pension plan assets, we maintain a significant portfolio of marketable securities as well as other assets subject to market fluctuations. Our earnings and stockholders equity could be adversely affected by changes in the value of this portfolio. In particular, the value of our investments may be adversely affected by general economic conditions, changes in interest rates, defaults and downgrades in the corporate bonds included in the portfolio and other factors. Each of these events may cause us to reduce the carrying value of our investment portfolio and may result in higher pension expense or our pension plans being further under-funded.
Acquisitions and divestitures pose financial and other risks and challenges.
We routinely explore acquiring other businesses and assets. From time to time, we also may consider disposing of certain assets, subsidiaries or lines of business. Potential acquisitions or divestitures present financial, managerial and operational challenges, including diversion of management attention, difficulty with integrating different corporate cultures or separating personnel and financial and other systems, increased expenses, assumption of unknown liabilities, indemnities and potential disputes with the buyers or sellers. There can be no assurance that we will engage in any acquisitions or divestitures or that we will be able to do so on terms that will result in any expected benefits. Acquisitions financed with borrowings could put financial stress on our earnings resulting in materially higher interest rates.
If we are unable to recruit and retain key personnel our business may be materially and adversely impacted.
Our business is also dependent on our ability to retain, hire and motivate talented, highly skilled personnel, including members of our management. Experienced personnel in our industry are in high demand and competition for their talents is intense. If we are unable to successfully attract and retain key personnel, our business may be harmed. Effective succession planning is also a key factor for our long-term success. Our failure to effectively transfer knowledge and effectuate smooth transitions with respect to our key employees could adversely affect our results and prospects.
We are engaged in ongoing litigation and may be the subject of additional proceedings, which could materially and adversely affect our business and results of operations.
We are currently involved in lawsuits initiated by our shareholders and similar litigation may be initiated against us. Additionally, we are subject to other legal and tax claims that arise from time to time. We cannot predict the outcome of any such proceedings or the likelihood that further proceedings will be instituted against us. We may not be successful in the defense of our current or future legal proceedings, which could result in settlements or damages that could adversely impact our business, financial condition and results of operations. Regardless of the merits of any claim, the continued maintenance of these legal proceedings may result in substantial legal expense and could also result in the diversion of our managements time and attention away from our business.
The consummation of the proposed merger with Danaher Corporation, and the completion of the tender offer for all of our outstanding shares, is subject to risks and uncertainties, including the satisfaction of specified conditions.
As described under Item 1, BusinessCompany History, on February 6, 2011, Beckman Coulter, Danaher and Djanet Acquisition Corp., a Delaware corporation and an indirect wholly-owned subsidiary of Danaher (Purchaser), entered into a definitive Agreement and Plan of Merger (the Merger Agreement), pursuant to which Danaher, through the Purchaser, agreed to commence an offer (the Offer) to acquire all of the outstanding shares of our common stock, par value $0.10 per share, for $83.50 per share in cash, without interest. The consummation of the transaction is subject to several conditions, including regulatory approvals.
We cannot predict whether the closing conditions to the Offer and those set forth in the Merger Agreement will be satisfied, and the transactions contemplated by the Merger Agreement may be delayed or even abandoned before completion if certain events occur. If the conditions to the Offer or the Merger Agreement are not satisfied or waived, or if the transactions are not completed for any other reason, (i) the market price of our common stock could significantly decline, (ii) we will remain liable for expenses that we have incurred related to the transaction, including financial advisor and legal fees, and may be required to pay the approximately $165 million termination fee and (iii) we may experience substantial disruption in our sales, research and development, and operating activities, and the loss of key personnel, customers, suppliers and other third-party relationships, any of which could materially and adversely affect us and our business, operating results and financial condition.
For further information on our pending transaction with Danaher, see Note 21 Subsequent Events of the Notes to consolidated financial statements in Item 8 of this Form 10-K.
Item 2. Properties.
We conduct a variety of operations at approximately 14 owned and 137 leased facilities worldwide, including administration, R&D, instrument and consumables manufacturing, warehouse and distribution, marketing, sales, and service. Beckman Coulters facilities often serve both our Clinical Diagnostics and Life Science segments.
Our corporate headquarters and principal business centers are located at the following facilities:
During 2009, we vacated our Fullerton, California facility, which we own, and consolidated these operations to other existing facilities. The Brea, California, Miami, Florida and Chaska, Minnesota facilities previously owned by us were sold and leased in 1998 for initial terms of 20 years with options to renew for up to an additional 30 years. We conduct a number of operations outside of the United States, which are principally administrative, manufacturing, and warehouse or distribution facilities and include locations in China, Czech Republic, France, Germany, Ireland, Japan and Switzerland.
We believe our production facilities meet applicable government environmental, health and safety regulations in all material respects and industry standards for maintenance and that our facilities in general are adequate for our current business.
Item 3. Legal Proceedings.
Certain of our legal proceedings in which we are involved are discussed in Note 18 Commitments and Contingencies of the Notes to consolidated financial statements in Item 8 of this Form 10-K and are incorporated by reference.
Item 4. Removed and Reserved.
Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The principal market on which our common stock is traded is the New York Stock Exchange. As of February 2, 2011 there were approximately 4,121 holders of record of our common stock.
Following are the high and low sales price of our common stock on the New York Stock Exchange Composite Transactions reporting system during each quarter of our fiscal years ended December 31, 2010 and 2009:
The declaration and payment of dividends is at the sole discretion of our Board of Directors. In 2010, we paid three quarterly dividends of $0.18 per share and one quarterly dividend of $0.19 per share, for a total of $0.73 per share of common stock for the year. During 2009, we paid three quarterly dividends of $0.17 per share and one quarterly dividend of $0.18 per share, for a total of $0.69 per share of common stock for the year.
ISSUER PURCHASES OF EQUITY SECURITIES
The 1,262 shares repurchased are attributable to shares surrendered to us by employees in payment of tax obligations related to the vesting of restricted stock.
The following graph compares our cumulative total stockholder return since December 30, 2005 with the Major Index, Industry Index and Peer Group Index composed of other companies with similar business models (Peer Group graph assumes that the value of the investment in our common stock and each index including reinvestment of dividends was $100.0 on December 30, 2005.)
Total Return To Shareholders
(Includes reinvestment of dividends)
Item 6. Selected Financial Data
(In millions, except amounts per share)
As a result of the 2009 adoption of the Financial Accounting Standards Board (FASB) standard related to debt with conversions and other options, prior year amounts in the below table have been adjusted.
The above items included in earnings from continuing operations, which we consider to be significant to understand our results, are not allocated to our segments for performance assessment by our chief operating decision maker.
2009 non-operating gains includes foreign currency gains of $26.7 million pretax in connection with the Olympus acquisition net of interest expense of $5.6 million pretax associated with the debt offering entered into to partially fund the Olympus acquisition two months before completing the Olympus acquisition.
2008 includes a non-operating gain of $1.2 million pretax of land from the escrow account that was in dispute in relation to the sale of vacant land in Miami.
2007 unusual non-operating (gains) losses includes gain on sale of vacant land in Miami of $26.2 million and $9.0 million charge for the establishment of the Beckman Coulter Foundation.
2006 includes other miscellaneous operating charges for the year of $4.0 million of pretax curtailment charges, $2.9 million pretax for investigation charges, and $7.7 million pre-tax for debt extinguishment charges.
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operation
The following discussion should be read in conjunction with the description of our Business in Item 1 of this Form 10-K and our consolidated financial statements and Notes to consolidated financial statements included in Item 8 of this Form 10-K. Managements Discussion and Analysis of Financial Condition and Results of Operations or MD&A is designed to provide a reader of our financial statements with managements perspective on our financial condition, results of operations, liquidity and certain other factors that may affect our future results.
Unless expressly noted to the contrary, all forward-looking statements that follow in this section relate to us on a stand-alone basis and are not reflective of the impact of the proposed transaction with Danaher.
We create value for customers and shareholders by understanding the process and impact of clinical testing and applying our skills and experience to simplify, automate and innovate complex laboratory processes. Our inspiration is to improve patient health and reduce the cost of care.
Following is a summary of key 2010 financial and nonfinancial information:
Recurring revenue growth, which we believe is the best indicator of our business overall strength, grew 12.3% (11.7% in constant currency). This increase is primarily due to a full year of revenues associated with the Olympus acquisition compared to five months in 2009. Excluding the Olympus acquisition, the growth rate was 5.1% (4.4% in constant currency). Strong growth in automated immunoassay recurring revenue in both Emerging Markets and Asia Pacific was partially offset by weakness in the U.S. and in Europe. Overall, recurring revenue grew modestly in developed markets particularly the U.S. where depressed healthcare utilization trends and in Europe where austerity measures continue to apply pressure on our recurring revenue growth.
We expect our recurring revenue, which represents 81.1% of our total revenue, to provide a predictable source of earnings and cash flow. Recurring revenue allows us to generate substantial operating cash flows, which we used to facilitate growth in our business by developing, marketing and launching new products through internal development and business and technology acquisitions.
Operating income increased as a result of increased recurring revenue and the decrease in restructuring and acquisition related costs in 2010 compared to 2009, due primarily to the Olympus acquisition in 2009. We also incurred $42.1 million in restructuring costs related to the Orange County consolidation and other restructuring initiatives in 2009, compared to $13.1 million for these same initiatives in 2010. The above contributions to the increase in operating income were partially offset by increases in cost of sales as a percentage of revenue and operating expenses particularly as a result of additional costs incurred in connection with our compliance and quality system improvement initiatives.
Non-operating expense increased during 2010 compared to 2009. During 2010, we incurred $12.7 million more in interest expense due to additional debt issued in connection with the Olympus acquisition in May 2009, combined with higher interest expense on our tax liabilities. In 2009 we recognized approximately $27 million in gains related to our hedging of the Olympus acquisition, which was paid in yen, and for settling intercompany loans associated with the transaction.
Our effective tax rate increased to 25.3% in 2010 from 20.2% in 2009, due to unfavorable discrete items in 2010 of $11.5 million primarily attributable to certain adjustments to prior year tax returns (including changes in judgment regarding certain prior year tax items) and a write-off related to Medicare drug subsidy deferred taxes.
Supply Chain Initiatives and Olympus Diagnostic Systems Acquisition
As part of our previously announced strategic supply chain management initiatives to improve productivity and reduce operating costs, we closed and relocated certain manufacturing and distribution sites. Our plans to vacate our Fullerton, California facility and consolidate those operations to other existing facilities (Orange County consolidation project) were developed in 2008 and completed in 2010. In 2010 we incurred $13.1 million in restructuring costs related to the Orange County consolidation and other 2009 restructuring initiatives, compared to $42.1 million incurred in 2009 for site consolidation and other initiatives. During 2010 and 2009, our acquisition of Olympus resulted in additional restructuring costs as we combined operations for efficiency. In connection with these activities, we recorded charges of $14.6 million and $88.3 million for severance and other costs for 2010 and 2009, respectively.
Acquisition Related Costs
In connection with the acquisitions of Olympus and Cogenics, the Genomics division of Clinical Data, Inc, we incurred acquisition related and integration costs of $16.6 million and $64.0 million during 2010 and 2009, respectively, in addition to the restructuring costs described above.
Quality Systems and Product Quality Matters
As previously reported, FDA indicated to us early in 2010 that it believed certain modifications to our AccuTnI troponin test kits as used on our UniCel DxI immunoassay systems and our Access immunoassay systems were made without obtaining appropriate product clearances from FDA. Below is the status to date:
As previously reported, in early 2010, we initiated a compliance and quality system improvement initiative. As part of this initiative, we undertook improvements to other products, including our sensor based tests used for sodium testing and for glucose testing on our DxC and LX chemistry systems. The improvements to our sodium testing included providing customers with directions for performing additional cleaning procedures and initiation of a comprehensive service plan intended to ensure that the systems are performing optimally. To address the performance issues with our glucose testing, we made changes to the software and redesigned some of the systems covers. We expect these actions to be fully implemented during the first half of 2011, and plan to continue looking for additional ways to improve the performance of these tests.
In August 2010, we began notifying customers using our AU clinical chemistry systems of the potential for incorrect results caused by overflow of the cuvette where the analyses are performed and that they should take additional steps to review the quality of the results generated by their instrument. The flooding has a number of causes, and we are in the process of making corrections by modifying instrument software. Once validated, these modifications are expected to be deployed to the installed base of instruments by the end of 2011.
Furthermore, with respect to our immunoassay instruments, we expect to advise our customers in the near future to maintain a narrower temperature range within their laboratory than the range indicated on the current labeling for the Access and DxI instruments. However, there can be no assurances that regulators will not require additional actions in connection with this matter. See Risk Factors- We are subject to various federal, state, local and foreign regulations, and compliance with these laws or any new laws or regulations could cause us to incur substantial costs and adversely affect our business and results of operations in Item 1A of this Form 10-K.
In addition, in light of our discussions with FDA regarding FDAs belief that we failed to obtain appropriate clearances for modifications made to our AccuTnI troponin test, we have initiated a review of other product modifications where a decision was made not to seek clearance or approval from FDA. This review is expected to continue through 2011 and potentially into 2012. During this review, we may identify other products for which additional clearance or approval may be needed. We intend to discuss the results of this review with FDA to ensure that appropriate clearances and approvals have been obtained for all products.
We are also continuing to evaluate our internal processes and procedures regarding quality systems and product quality matters. We have identified corrections and corrective actions needed as part of that process, and it is possible that other products could be impacted resulting in corrective actions that might adversely affect our operating results.
As a result of these matters, we utilized certain technical staffing resources and personnel to focus on improving current products, and the costs of those resources and personnel amounting to $15.9 million were charged to cost of sales in 2010 rather than research and development. Furthermore, to implement our actions described above, we increased our costs in quality and regulatory assurance, service and customer support. These costs increased cost of sales and selling, general and administrative expenses in 2010 by approximately $27 million and $12 million, respectively.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles or U.S. GAAP. To prepare our financial statements, we make assumptions and estimates about future events and apply judgments that affect the reported amounts of assets, liabilities, revenue, expenses and the related disclosures. We base our assumptions, estimates and judgments on historical experience, current trends and other factors that management considers relevant. Because future events and their effects cannot be determined with certainty, actual results could differ materially from our assumptions and estimates.
We describe our significant accounting policies in Note 1, Nature of Business and Summary of Significant Accounting Policies of the Notes to consolidated financial statements in Item 8 of this Form 10-K. Management believes that the following accounting estimates are important to fully understanding and evaluating our reported financial results, and they require managements subjective or complex judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain. Management has reviewed these critical accounting estimates and related disclosures with the Audit & Finance Committee of our Board of Directors.
Revenue is recognized when persuasive evidence of an arrangement exists, the price to the buyer is fixed or determinable, when collectability is reasonably assured and when risk of loss transfers. For instrument sales that include customer specific acceptance criteria, revenue is recognized when the acceptance criteria have been met. When a customer enters into an OTL agreement, lease revenue is recognized on a straight-line basis over the life of the lease, while the cost of the leased equipment is carried in customer leased instruments within property, plant and equipment and depreciated over its estimated useful life. Supplies and test kit revenue is generally recognized at the time of delivery or usage. Service revenue on maintenance contracts is recognized ratably over the life of the service agreement or as service is performed, if not under contract.
For those sale agreements that include multiple deliverables, such as installation, training, after-market supplies or service, we allocate revenue based on the relative fair values of the individual components. The fair market value of our instruments is determined by a range of cash selling prices or other verifiable objective evidence, if applicable. We regularly evaluate available objective evidence of instrument fair values using historical data. Our allocation of revenue for future sales could be affected by changes in estimates of the relative fair value of the various deliverables which could affect the timing of our revenue recognition or allocation to the various components.
Our accounting for leases involves specific determinations under the accounting standard for leases, as amended, which often involves complex provisions and significant judgments. In 2005, we changed our standard leasing terms around cancellation provisions to adopt terms which meet the criteria for OTL classification. As a result, nearly all of our lease arrangements are OTLs. Certain of our lease contracts are customized for larger customers and often result in complex terms and conditions that typically require significant judgment in applying the lease accounting criteria.
We allocate the purchase price of acquired companies to the tangible assets acquired, liabilities assumed and intangible assets acquired, including in-process research and development or IPR&D, based on their estimated fair values. The excess of the purchase price over these fair values is recorded as goodwill. We engage independent third-party appraisal firms to assist us in determining the fair values of assets acquired and liabilities assumed. Such valuations require management to make significant estimates and assumptions, especially with respect to intangible assets. The significant purchased intangible assets recorded by us include customer and dealer relationships, developed and core technology and trade names. The fair values assigned to the identified intangible assets are discussed in detail in Note 3 Acquisitions of the Notes to consolidated financial statements in Item 8 of this Form 10-K.
Critical estimates in valuing certain intangible assets for business combinations include:
Managements estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates.
Other estimates associated with the accounting for acquisitions may change as additional information becomes available regarding the assets acquired and liabilities assumed, as more fully discussed in Note 3 Acquisitions of the Notes to consolidated financial statements in Item 8 of this Form 10-K.
Allowances for Doubtful Accounts
We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. These allowances are determined by analyzing specific customer accounts that have known or potential collection issues and applying an estimated loss rate to the aging of the remaining accounts receivable balances. This estimated loss rate is based on our historical loss experience but also contemplates current market conditions. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.
Inventories, which include material, labor and manufacturing overhead, are valued at the lower of cost or market using the first-in, first-out or FIFO method of determining inventory cost. Inventory schedules are analyzed quarterly by finance and logistics personnel, and where necessary, provisions for excess and obsolete inventory are recorded based primarily on our estimated forecast of product demand and production requirements. A significant decrease in forecasted demand could result in an increase in the amount of excess inventory quantities on hand requiring additional inventory reserves or write-downs and increased cost of sales.
Customer Leased Instruments
The economic life of our leased instruments requires significant accounting estimates and judgment. These estimates are based on our historical experience. The most objective measure of the economic life of our leased instrument is the original term of a lease, which is typically five or seven years, since historically a majority of the instruments are returned by the lessee at or near the end of the lease term and there is not a significant after-market for our used instruments without substantial remanufacturing. The economic life of products acquired in connection with the Olympus acquisition is estimated to be seven years based upon the instruments historical experience in the field. We believe these lives represent the periods during which the instruments are expected to be economically usable, with normal service, for the purposes for which they are intended. We evaluate regularly the economic life of existing and new products for purposes of this determination.
Valuation of Other Long-Lived Assets
The process of evaluating the potential impairment of other long-lived assets, such as our property, plant and equipment, including software for internal use, is subjective and requires judgment. We review long-lived assets for impairment when events or changes in circumstances indicate the carrying value of an asset may not be recoverable. If the fair value is less than the assets carrying amount, we recognize a loss for the difference. To estimate the fair value of long-lived assets, we typically make various assumptions about the assets usefulness and consider market factors specific to the business in which the asset is used and estimate future cash flows to be generated by that business. Based on these assumptions and estimates, we determine whether we need an impairment charge to reduce the value of the asset stated on our balance sheet to reflect its estimated fair value. Assumptions and estimates about future values and remaining useful lives are complex and often subjective. They can be affected by a variety of factors, including industry and economic trends, changes in our business strategy and our internal forecasts. Furthermore, we may determine that our assets have a shorter useful life than our current estimate, which would result in a higher depreciation and amortization expense. Although we believe our past assumptions and estimates have been reasonable and appropriate, changes in the assumptions and estimates could materially impact our future reported financial results.
Goodwill and Other Intangible Assets
We review goodwill and other intangible assets for impairment at least annually, or more frequently when events or changes in circumstances indicate the assets may be impaired. Goodwill is evaluated for impairment at the reporting unit level that is an operating segment or one level below an operating segment. For goodwill, we compare the carrying value to the fair value of the reporting unit to which the assets are assigned.
In September 2009, we reevaluated our core technology, which previously had an indefinite useful life. We considered current and expected technological changes evolving in the marketplace, including the potential of our competitors developing newer technologies, and determined that over time these factors could make our core technology less valuable for our related products. Thus, we deemed it appropriate to assign an estimated 20 year useful life to the technology. Our core technology assets are not impaired. The incremental annual amortization resulting from this change is approximately $2.3 million.
Our future operating performance will be impacted by the future amortization of intangible assets with finite lives and potential impairment charges related to goodwill or intangibles with indefinite lives. As a result of business acquisitions, the allocation of the purchase price of the acquired companies to goodwill and intangible assets requires us to make significant estimates and assumptions, including estimates of future cash flows expected to be generated by the acquired assets and the appropriate discount rate for these cash flows. If conditions differ from managements estimate at the time of acquisition, material write-downs of intangible assets or goodwill may be required, which could adversely affect our operating results. We assess impairment annually during the fourth quarter of our fiscal year. See Note 8 Goodwill and Other Intangible Assets of the Notes to consolidated financial statements of this Form 10-K for further discussion.
Compliance with federal, state and foreign environmental laws and regulations may require us to remove or mitigate the effects of the disposal or release of chemical substances in jurisdictions where we do business or maintain properties. We establish accruals when such costs are probable and can be reasonably estimated, estimating accrual amounts based on currently available information, regulatory requirements, remediation strategies, historical experience, our relative share of the total remediation costs and a relevant discount rate, when the time period of estimated costs can be reasonably predicted. Changes in these assumptions could impact our future reported results.
We record liabilities for potential income tax assessments based on our estimate of potential tax related exposures. These estimates require significant judgment as uncertainties often exist in interpretations of new laws, new interpretations of existing laws and rulings by multiple taxing authorities. Differences between actual results and our assumptions, or changes in our assumptions in future periods, are recorded in the period they become known. Changes in our estimates could have a material effect on our effective income tax rate in the period.
Deferred income taxes are recognized for the tax consequences of temporary differences by applying enacted statutory tax rates applicable to future years to the difference between the financial statement carrying amounts and the tax bases of existing assets and liabilities and for tax credit carryforwards. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date.
We establish a valuation allowance to reduce deferred tax assets to an amount whose realization is more likely than not. An increase or decrease to net earnings may occur if we were to determine that we were able to utilize more or less of these deferred tax assets than currently expected.
In the fourth quarter of 2010 the U.S. Congress enacted legislation extending the Research & Experimentation (R&E) tax credit for the 2010 and 2011 tax years. As a result, we recorded an estimated 2010 R&E credit of $5.2 million in the fourth quarter of 2010. The 2008 financial statements include the benefit for the 2008 and 2007 R&E tax credits of $8.9 million and $8.7 million, respectively. In years prior to 2008, due to the difficulty in estimating the R&E credit on a current basis, we used a method to record the R&E tax credit for financial reporting purposes that resulted in recognizing the benefit in the year subsequent to the credit utilization on its tax return. The prior method used to record the R&E tax credit did not have a material impact on any of the financial statements presented.
Pension and Postretirement Benefit Plans
We sponsor pension plans in various forms, and a postretirement medical benefit plan which covers U.S. employees and retirees who met certain eligibility criteria at the end of 2002. The obligations under these plans are recognized in the consolidated financial statements based upon a number of factors which are used to determine the expense, liabilities and asset values related to the plans. Two of the critical assumptions are the expected long-term rate of return on plan assets and the discount rate. Other important assumptions include expected future salary increases, retirement dates, employee turnover, mortality rates and the health care cost trend rate. We review these assumptions annually.
The expected long-term rate of return on plan assets is estimated based upon historical cumulative returns on plan assets, the investment strategy, plan asset allocation and expected returns. While there is no absolute predictor of future performance, our historical return on plan assets has been over 8%. We believe our expected long-term rate of return assumption, which is used to calculate pension expense, of 8.25% in 2010, 8.25% in 2009 and 8.5% in 2008, is reasonable based on our investment strategy and our long-term investment return experience. We froze entrance to the pension plan effective December 31, 2006 and changed the investment allocation in December 2007 in an effort to reduce the volatility of changes in the fair value of plan assets.
The discount rate is an assumption used to determine the actuarial present value of benefits attributed to the services rendered by participants in our pension and postretirement benefit plans. The rate used reflects our best estimate of the rate at which pension and postretirement benefits will be effectively settled considering the timing of expected payments to plan participants. The discount rates are developed based on benchmarking indexes and yield curve analyses. The benchmarking indexes are obtained by using high-quality long-term corporate bond yields currently available with terms similar to the expected timing of payments to be made under our pension obligation. The discount rates used to determine the benefit obligations for the U.S. pension and postretirement plans were selected by us, in consultation with independent actuaries, using an average of pension discount yield curves based on the characteristics of the U.S. pension and postretirement liabilities, each determined independently. The weighted average discount rate we utilized to measure our U.S. pension obligation as of December 31, 2010 and to calculate our 2011 expense was 5.33% in comparison to 5.78% used in determining our 2010 expense. The 45 point decrease in the discount rate is consistent with the tightening of spreads on the rates of return of risk-free fixed income securities and the rates of return on high quality fixed income securities that reflect credit or risk premiums. For all other non-U.S. pension plans, we set the assumed discount rates based on the nature of liabilities, local economic environments and available bond indices or a third party yield curve.
Changes in the expected long term rate of return on assets (ELTRA) or discount rate could have a material effect on our reported pension obligation and related pension expense. The following table illustrates the sensitivity to a change to certain key assumptions used in the calculation of 2011 pension expense and the projected benefit obligation (PBO) at December 31, 2010 for our major U.S. and non-U.S. defined benefit pension plans (in millions):
Our funding policy provides that payments to our domestic pension trusts will at least be equal to the minimum funding requirements provided for by the Employee Retirement Income Security Act of 1974.
We measure and recognize compensation expense for all share-based payment awards made to employees and directors. Share-based payments include stock options, employee stock purchases under the Employee Stock Purchase Plan, restricted stock and performance shares. Share-based compensation expense is based on the value of share-based payment awards that is ultimately expected to vest. We have elected to use the Black-Scholes-Merton option-pricing model which incorporates various assumptions, including volatility, expected life and interest rates to estimate the fair value of stock options. The expected life is based on the observed and expected time to post-vesting exercise and forfeitures of stock options by our employees. We use a combination of historical and implied volatility, or blended volatility, in deriving the expected volatility assumption. The risk-free interest rate assumption is based upon observed interest rates appropriate for the term of our stock options based on U.S. Treasury bond yields. The dividend yield assumption is based on our history and expectation of dividend payouts. Forfeitures were estimated based on our historical experience. We evaluate and adjust our assumptions on an annual basis. If factors change and we employ different assumptions in the application of the accounting guidance for share based compensation in future periods, the compensation expense that we record may differ significantly from what we have recorded in the current period.
Accrual for Litigation Loss Contingencies
We are involved in a number of legal actions, the outcomes of which are not within our complete control and may not be known for prolonged periods of time. In accordance with U.S. GAAP, we record a liability in our consolidated financial statements for these contingent liabilities when a loss is known or considered probable and the amount can be reasonably estimated. If the reasonable estimate of a known or probable loss is a range, and no amount within the range is a better estimate than any other, the minimum amount of the range is accrued. If a loss is possible, but not known or probable, and can be reasonably estimated, the estimated loss or range of loss is required to be disclosed in the notes to consolidated financial statements. In most cases, significant judgment is required to estimate the amount and timing of a loss to be recorded. Our significant legal proceedings are discussed in Note 18 to the consolidated financial statements.
Results of Operations
Management reviews revenue by segment, product area, markets we serve and major geographic area. To facilitate our understanding of results, we review revenue on both a reported and constant currency basis. We define constant currency revenue as current period revenue in local currency translated to U.S. dollars at the prior years foreign currency exchange rate for that period, computed monthly. Constant currency growth is defined as current period constant currency revenue less prior year reported revenue divided by prior year reported revenue. This measure provides information on revenue growth assuming that foreign currency exchange rates have not changed between the prior year and the current period. We believe the use of this measure aids in the understanding of our operations without the impact of foreign currency fluctuations. This presentation is also consistent with our internal use of the measure, which we use to measure the profitability of ongoing operating results against prior periods and against our internally developed targets. Constant currency revenue and constant currency growth as defined or presented by us may not be comparable to similarly titled measures reported by other companies. Additionally, these measures are not U.S. GAAP defined measures, and therefore not an alternative measure of revenue or revenue growth on a U.S. GAAP basis.
The following represents a breakout of our 2010 revenue by type, segment and geography:
Note: Emerging Markets includes Eastern Europe, Russia, Middle East, Africa and India.
The following table provides revenue by type, segment and geography for 2010, 2009 and 2008 (dollar amounts in millions):
Revenue for 2010 includes the following amounts related to our Olympus acquisition completed on August 3, 2009 (in millions):
Revenue for 2009 includes the following amounts related to our Olympus acquisition completed on August 3, 2009 (in millions):
Recurring revenue, the best indicator of the overall strength of our business, grew 12.3% (11.7% in constant currency) in 2010 in comparison to 2009, including growth of $197.4 million or 7.5% due to the Olympus acquisiton. 2009 includes revenues from the Olympus acquisition from the acquisition date of August 3, 2009 forward. Automated immunoassay recurring revenue growth in both Emerging Markets and Asia Pacific was partially offset by weakness in the U.S. Recurring revenue has grown consistently year over year in both 2010 and 2009.
Recurring revenue grew 10.1% (12.9% in constant currency) in 2009 in comparison to 2008, including growth of 6.6% due to the Olympus acquisition. Strong growth in consumable sales in immunoassay, continued growth in other product areas including the continued build up of lease payments and the acquisition of Cogenics in April 2009 contributed to the increase. Recurring revenue represented 81.1% of our total revenue during 2009.
Year over year instrument sales revenue increased by 12.8% or 12.0% in constant currency during 2010 after declining by 11.6% or 11.3% in constant currency during 2009. Excluding the Olympus acquisition, instrument sales were down slightly as a result of the constrained economic environment which particularly impacted sales to life science customers as well as our quality challenges. In developed markets, hospital customers continue to be cautious with their capital spending in the current economic environment and are more frequently choosing operating-type leases over capital purchases. On the other hand, the decline in 2009 was despite additional sales of $26.8 million from Olympus products. The overall decline in 2009 cash instrument sales is due to a number of factors, including the continued difficult economic environment, the tightening of the credit markets, constrained hospital and research operating environment and the strengthening dollar in the first half of 2009. As a result, sales were negatively impacted as customers remained cautious in their capital spending and in some cases delayed purchases.
During 2010 Clinical Diagnostics revenue increased by 15.1% primarily as a result of including a full years results from the Olympus acquisition compared to five months in 2009 and organic growth in recurring revenue. Continued growth in automated immunoassay, hemostasis and chemistry contributed to the increase in recurring revenue. Recurring revenue growth largely reflects an expanding installed base, particularly in Asia Pacific and Emerging Markets, and increased test kit utilization in those markets, partially offset by a decline in revenue in developed markets, including Europe and the U.S.
Clinical Diagnostics revenue increased by 7.6% in 2009 compared to 2008, as a result of the acquisitions of Cogenics and Olympus and organic growth in recurring revenue, offset by the decline in instrument sales. In constant currency, Clinical Diagnostics realized an increase in revenue of 10.0% for the year primarily driven by a 14.2% improvement in recurring revenue. The Olympus acquisition accounted for $158.5 million, or 7.2% of growth in recurring revenue during 2009. Continued robust growth in Access Immunoassay also contributed to the increase. Recurring revenue growth, excluding the effect of the Olympus acquisition, largely reflects an expanding installed base, particularly in China, and increased test kit utilization. The gains in recurring revenue, however, were partially offset by declines in instrument sales of 13.9% in constant currency, in comparison to the prior year. The decline in instrument sales was mainly due to cellular analysis products, which declined by more than 19% during 2009 as compared to unusually strong instrument sales during 2008, which benefited, in part, by increased sales as we recovered from a 2007 supply disruption.
Chemistry and Clinical Automation. Revenue from chemistry and clinical automation increased by 26.1% (25.8% in constant currency) in 2010. The Olympus acquisition represented all of the growth in this product area.
In 2009, the Olympus acquisition contributed revenue of $180.1 million. Recurring revenue in constant currency from the existing business increased by 6.5% in 2009, however, cash instruments sales were down due to the constrained economic environment. We achieved a fifth consecutive record year of integrated chemistry system placements, growing our installed base in mid to large sized hospitals and experiencing strong demand internationally as our customers focus on the efficiency and cost savings that can be provided by increased automation.
Cellular Analysis. During 2010, revenue from cellular analysis increased 6.2% (5.0% in constant currency). The growth was driven by an increase in instrument sales in flow cytometry and recurring revenue growth in hemostasis and flow cytometry.
During 2009, revenue from cellular analysis decreased in 2009 due primarily to a 19.3% constant currency decline in cash instrument sales for the year due in large part to significantly lower placement of instruments in Hematology. We believe Hematology sales were down due primarily to unusually high sales in 2008 and the effect of constrained capital spending due to the economic environment in 2009. Cash instrument sales were unusually high during 2008 as we resolved a 2007 backlog related to a supply chain disruption. In addition, the constrained capital expenditure environment, including a stronger dollar in the first half of 2009, has had a negative impact on our cash instrument sales. Instrument sales in flow cytometry declined as a result of constrained funding in the research market. The decline in instrument sales, however, was partially offset by an increase in recurring revenue.
Immunoassay and Molecular Diagnostics. In 2010 revenue in immunoassay and molecular diagnostics increased by 11.1% (10.7% in constant currency). The growth was primarily from an 11.1% increase in automated immunoassay recurring revenue, particularly in Asia Pacific and Emerging Markets, and solid growth in molecular diagnostics products and services.
Revenue in immunoassay and molecular diagnostics in 2009 increased due to an increase in sales of consumable products, primarily Access Immunoassay. Recurring revenue grew by 9.0% and 12.3% in constant currency for 2009. Growth in placements of mid to ultra high volume Immunoassay systems in 2008 helped increase our penetration at the account level and fueled recurring revenue growth. Additionally, the acquisition of Cogenics in April 2009 and Olympus in August 2009 contributed $16.8 million and $5.2 million to revenue during the year, respectively.
Revenue from our Life Science products in 2010 decreased 4.0% (4.4% in constant currency). Instrument sales were weak in Europe and the U.S. In both the U.S. and Europe, customers continued to be cautious with their capital spending in the current economic environment and there were lower levels of stimulus spending by governments. Consolidation within the pharmaceutical industry also contributed to the decline in revenues.
Revenue in 2009 decreased due to lower cash instrument sales, which declined by 8.8% (8.1% in constant currency) for the year. The decline was due to the economic conditions in 2009, which caused customers to delay capital spending.
Revenue by Major Geography
Overall, revenue in the U.S. increased 5.8% in 2010. Revenues excluding Olympus reflect weaker demand, with 1.3% organic growth in recurring revenue for the year. The current economic environment has contributed to the lower growth in revenue in the U.S. Utilization of U.S. healthcare has decreased with fewer physician office visits affecting laboratory testing volumes. Recurring revenue was also constrained in the U.S. by the limitations on expanding our customer base due to the prohibition of offering our troponin test to new customers and by quality issues described previously.
In 2009, revenue in the U.S. increased as a result of revenue from the Olympus and Cogenics acquisitions and from growth in recurring revenue, partially offset by declines of more than 24% in cash instrument sales due to the factors mentioned earlier.
In 2010 revenue in Europe increased 9.0% (12.5% in constant currency). Revenues excluding Olympus decreased 2.4% as a result of softness in demand due to austerity measures adopted by many countries. The central laboratory market in Europe is changing due to consolidation, with central laboratories expecting a lower price for increased volumes. The overall increase of 12.5% in constant currency is due to growth of Olympus products in chemistry and clinical automation. Revenue in Europe increased in 2009 due to an increase in recurring revenue of 17.8%, primarily resulting from the Olympus acquisition and from solid growth in immunoassay and molecular diagnostics. The region, however, experienced a decline in cash instrument sales of 6.7% or 4.3% in constant currency. We believe that the decline is due to adverse credit market and economic conditions which has led some customers to defer capital expenditures.
Revenue from Emerging Markets in 2010 increased by 21.0% (18.7% in constant currency) or 7.7% in constant currency excluding Olympus. The increase was due to an additional seven months of revenue from the Olympus acquisition and an increase in recurring revenue from our automated immunoassay and cellular product areas due to efforts to expand the installed base of instruments and stronger demand in Russia, Turkey, and India. However, in 2009 revenue decreased by 2.9% (a 3.3% increase in constant currency) as we experienced a decrease in cash instrument sales. Overall, cash instrument sales dropped by 38% on a constant currency basis. Sales in 2008 had been particularly strong due to the weaker dollar which enabled us to increase our market penetration. However, in 2009, the stronger dollar and difficult economic environment reduced cash instrument sales. Recurring revenue increased due to revenue from the Olympus acquisition and continued growth in recurring revenue from instruments placed in prior years.
Sales in Asia Pacific increased 32.4% (27.6% in constant currency) during 2010. The increase was due to an increase in recurring revenue from an expanded installed base particularly in our immunoassay and molecular diagnostics product area. China led robust growth in Asia Pacific, up more than 34% for the year exclusive of Olympus product revenue.
Sales in Asia Pacific increased by 24.5% (22.0% in constant currency) during 2009 mainly due to 22.2% growth in recurring revenue (20.4% in constant currency), led by growth in products from chemistry and clinical automation as a result of the Olympus acquisition and immunoassay and molecular diagnostics. China continued to experience the highest growth, up 37.0% (35.9% in constant currency).
Cost of Sales
Overall, our cost of sales increased $251.4 million or 14.3% during 2010 as compared to 2009. Cost of sales as a percent of revenue increased 0.9% as a result of product mix. Additionally, cost of sales were negatively impacted by the higher service expenses of $62.0 million and higher line engineering costs of $15.9 million due to the product quality improvement initiatives in 2010.
Cost of sales increased $88.6 million or 5.3% during 2009. The Olympus acquisition contributed $130.1 million in cost of sales during 2009, including a charge of $22.1 million for the effect of the inventory accounting purchase adjustment in connection with the acquisition accounting. Excluding the cost of sales generated from the Olympus acquisition, cost of sales decreased by 2.5% due in part to a 0.8% decrease in overall sales. Cost of sales decreased more than sales due primarily to a mix favoring recurring revenue, which yields stronger margins.
Selling, General and Administrative
Selling, general and administrative or SG&A expense for 2010 increased by $85.9 million, due primarily to:
In 2009, SG&A increased by $18.2 million compared to 2008 primarily due to (a) $39.4 million in additional SG&A associated with the Olympus business, a $25.5 million increase in pension expense and charges of $8.0 million related to legal matters, offset by (b) an overall decline in SG&A spending of $54.7 million primarily due to our continued focus on cost containment initiatives, especially in light of the shortfall in cash instrument revenue combined with the effect of a stronger dollar during the first half of 2009.
Research and Development
During 2010 R&D costs increased by $2.2 million primarily due to additional product development investments in our molecular diagnostics program, DxN, and the Olympus product line. This was offset by a reduction in R&D spending of $15.9 million as resources were shifted to improve quality on current products and charged to cost of sales instead of R&D. The increase was despite a charge of $5.8 million incurred in the third quarter of 2009 for the purchase of a sublicense to certain patent rights which will be used to develop a molecular assay.
R&D costs decreased by $13.7 million during 2009 despite the added R&D costs of $17.1 million associated with the Olympus business and the purchase of a $5.8 million sublicense described above. The primary reason for the decrease relates to the following R&D charges incurred during 2008:
The products under the above agreements have not received regulatory clearance, are still in the development stage and do not have alternative future use; therefore the costs were charged to R&D expense.
Amortization of Intangibles
Amortization of intangibles increased by $16.1 million during 2010 and $10.0 million during 2009 due primarily to the inclusion of 12 months of amortization in 2010 associated with the acquired intangibles from the Olympus acquisition in comparison to 5 months of amortization included in 2009 related to these same intangibles. Amortization of intangible assets is related primarily to assets for acquired technology, customer and distributor relationships.
Restructuring and Acquisition Related Costs
Restructuring and acquisition related costs decreased by $121.1 million in 2010 compared to 2009 due primarily to completion of our restructuring and integration initiatives in 2010, including the integration of Olympus. During 2009, we experienced high restructuring costs primarily due to the costs associated with integrating the Olympus acquisition and the closure and relocation of certain manufacturing and distribution sites along with activities related to our 2008 plan to vacate our Fullerton, California facility and consolidate those operations to other existing facilities. These additional costs include $105.7 million related to the Olympus acquisition and $45.0 million related to the closure and relocation of certain sites including severance, relocation, and other exit costs. Additionally, we analyzed the remaining useful life of certain assets, which in some cases resulted in a shorter life than our initial estimate. Based on this revised and shortened useful life, we accelerated depreciation expense, which resulted in $1.6 million of higher depreciation during 2009.
During 2008 we began conducting soil and groundwater environmental studies at our Fullerton, California site in connection with our Orange County consolidation and planned closure of the Fullerton site. These studies indicate that the soil and groundwater at the Fullerton site contain chemicals previously used in operations at the facility. As a result, we recorded a $19.0 million environmental remediation charge related to our Fullerton facility. The $19.0 million represents our best estimate of future expenditures for evaluation and remediation at the site. The ultimate costs may range from $10 million to $30 million.
Management evaluates business segment performance based on revenue and operating income exclusive of certain adjustments, which are not allocated to our segments for performance assessment by our chief operating decision maker. Certain costs, such as corporate overhead and other charges which are not directly related to our segments are not allocated to the segments financial results. Therefore, the financial results of our segments exclude these costs for performance assessment by our chief operating decision maker. Unallocated corporate overhead costs include employee benefits, occupancy, information systems, accounting services, internal legal staff, and human resources administration expenses related to our corporate function, while other items excluded from our segment results include restructuring charges, technology license fees and other charges. In prior years, these costs were allocated to the segments based on actual usage or other appropriate methods. However, these expenses are not considered direct costs of the operating segments. Therefore, our chief operating decision maker now evaluates the segments excluding these costs. In the tables below, these costs have been reclassified in the prior year results to conform with the current year presentation.
The following table presents operating income for each reportable segment for 2010, 2009 and 2008 and a reconciliation of our segment operating income to consolidated earnings before income taxes (dollar amounts in millions):
The increase in operating income generated from the Clinical Diagnostics segment during 2010 and 2009 is due primarily to the increase in revenue from the Olympus acquisition coupled with higher recurring revenue which has higher profit margins than cash instrument sales.
The decrease in operating income for our Life Science segment during 2010 was due primarily to a decrease in Life Science revenues as a result of weak demand within the industry. The decrease in 2009 as compared to 2008 was due primarily to a 6.9% decrease in revenue, with lower cash instrument sales being a significant driver.
Non-Operating Income and Expense
Interest income decreased during 2010 and 2009 due, in part, to our decreasing investment in STL receivables coupled with overall lower rates of interest on our cash and investment balances.
Interest expense in 2010 and 2009 increased by $23.2 million and $15.8 million, respectively due primarily to additional interest expense of $12.7 million and $19.6 million in 2010 and 2009, respectively, resulting from our $500 million issuance of debt to finance the Olympus acquisition. During 2010, we also incurred $4.1 million in higher interest expense on our income tax liabilities. Additionally, on July 8, 2010, $11.0 million of our $235.0 million Senior Notes due November 15, 2011 were redeemed pursuant to the terms of the Senior Notes. In connection with this redemption we incurred $0.7 million in debt extinguishment costs that were recorded within interest expense during the third quarter of 2010.
Other non-operating income decreased in 2010 and increased in 2009 primarily related to foreign currency gains recorded in 2009 related to the Olympus acquisition. During 2010, we recorded a gain of $2.3 million related to the sale of an investment and a product line. In 2009, we recognized a $19.6 million hedging gain associated with forward contracts to purchase Japanese yen. Since our purchase price for the Olympus acquisition was paid in yen, we entered into forward contracts in an effort to mitigate the risk associated with changes in the value of the yen which we settled as of July 30, 2009. During 2009, we also recorded a $2.2 million foreign currency gain on the value of the yen for the period between settling the forward contract and the transfer of funds in yen to purchase Olympus. Additionally, we recorded a $4.9 million foreign currency gain related to the settlement of intercompany loans related to the Olympus acquisition in 2009.
Income tax as a percentage of pretax earnings from continuing operations was 25.3% in 2010, 20.2% in 2009 and 22.0% in 2008. Unfavorable discrete items which increased tax expense for 2010 were primarily attributable to certain adjustments to prior year tax returns (including changes in judgment regarding certain prior year tax items) and a write-off related to Medicare drug subsidy deferred taxes.
Our effective tax rate was lower than the United States federal statutory rate due primarily to:
During 2009, we filed certain tax accounting method changes with the U.S. Internal Revenue Service (IRS). As a result of these accounting method changes, certain tax deductions were accelerated and reflected in the 2008 federal income tax return, resulting in a net operating loss for that year for tax purposes. This loss has been carried back to the 2006 tax year and reduces taxes previously paid. We received a total of $66.0 million in additional tax refunds in 2009 resulting from accounting method changes. The acceleration of these tax deductions reduces certain permanent tax benefits in tax years 2008 and 2006. The impact of the reduction of these permanent tax benefits, totaling $3.4 million, was reflected as a discrete item in the tax provision for 2009.
Additional R&E tax credits of $8.9 million were recorded in 2008 to record the credits in the year earned. Prior to 2008 we recorded R&E credits in the following year due to difficulties in estimating credits. Total R&E tax credits recorded in 2008 were $17.6 million ($8.9 million for 2008 credits and $8.7 million for 2007 credits). R&E credits recorded in 2007 were $6.2 million (related to 2006 credits).
Income tax as a percentage of pretax earnings from continuing operations was impacted negatively in 2008, 2009 and 2010 by the establishment of a joint intercompany research and development program in Ireland in 2008. This program is expected to continue to negatively impact our tax rate over the next couple of years but yield a lower long term tax rate. See Note 13 Income Taxes of the Notes to consolidated financial statements in Item 8 of this Form 10-K for a reconciliation of the U.S. statutory tax rate to our effective tax rate. We expect the effective tax rate in 2011 to be higher than 2010 by one to two percentage points due primarily to lower foreign tax credits. Our 2011 effective tax rate, however, may be impacted by a number of factors including, enactments of new tax laws, new interpretations of existing tax laws, rulings by and settlements with taxing authorities, our generation of tax credits, including R&E tax credits and our geographic profit mix.
Throughout this section, references are made to the following financial measures: constant currency, and adjusted diluted earnings per share. These financial measures are an alternative presentation of our past and potential future operational performance and do not replace the presentation of our reported financial results under U.S. GAAP. We have provided these supplemental non-GAAP financial measures because they provide meaningful information regarding our results on a consistent and comparable basis for the periods presented. We use these non-GAAP financial measures for reviewing the operating results of our business segments, for analyzing potential future business trends in connection with our budget process and base certain annual bonus plans on these non-GAAP financial measures. In order to measure our sales performance on a constant currency basis, it is necessary to remove the impact of changes in foreign currency exchange rates which affects the comparability and trend of sales. Constant currency results are calculated by translating current year results at prior year foreign currency exchange rates for the period, computed monthly. In addition, we believe investors will utilize this information to evaluate period-to-period results on a comparable basis and to better understand potential future operating results. We encourage investors and other users of these financial statements to review our consolidated financial statements and other publicly filed reports in their entirety and not to rely solely on any single financial measure. Non-GAAP financial measures should be considered in addition to, but not as a substitute for or superior to, other measures of financial performance prepared in accordance with GAAP.
Adjusted diluted earnings and earnings per share excludes the impact of income and expense such as charges associated with restructuring or relocations in connection with our supply chain improvement initiatives, acquisition and integration related expenses, license fees, amortization of intangible assets acquired from Olympus and other income and expense items. Management uses adjusted earnings per share to prepare operating budgets and forecasts to measure against our performance and to evaluate management performance for compensation purposes. Reconciliations of net earnings per share, the GAAP measure most directly comparable to adjusted earnings per share, are provided below.
Liquidity and Capital Resources
Our cash balances are held in numerous locations throughout the world. Some amounts held outside of the United States could be subject to United States federal income taxes if repatriated, less applicable foreign tax credits. Repatriation of some foreign balances is restricted by local laws. We have provided for the United States federal tax liability on these amounts for financial statement purposes, except for foreign earnings that are considered indefinitely reinvested outside of the United States. Repatriation could result in additional United States federal income tax payments in future years. Where local restrictions prevent an efficient intercompany transfer of funds, our intent is that cash balances would remain outside of the United States and we would meet United States liquidity needs through ongoing cash flows, external borrowings, or both. We utilize a variety of tax planning and financing strategies in an effort to ensure that our worldwide cash is available in the locations in which it is needed.
Liquidity is our ability to generate sufficient cash flows from operating activities to meet our obligations and commitments. Liquidity includes our ability to obtain appropriate financing and to convert assets that are no longer required in meeting existing strategic and financing objectives into cash. For purposes of achieving long-range business objectives and meeting our commitments, liquidity cannot be considered separately from capital resources that consist of current and potentially available funds.
Our business model, in particular recurring revenue comprised of consumable supplies (including reagent test kits), service, and OTL payments, allows us to generate substantial operating cash flows. We continue to invest a substantial portion of this cash flow in instruments leased to customers. We expect operating cash flows to increase as our revenue and depreciation from new OTLs increase year over year. We anticipate our operating cash flows together with the funds available through our credit facilities will continue to satisfy our working capital requirements. During the next twelve months, we anticipate using our operating cash flows or other sources of liquidity to:
We expect payments associated with the environmental clean up of our Fullerton facility to become more significant in 2011 and beyond. Proceeds from the potential sale of the Fullerton facility are not anticipated in the near term.
In November 2001, we issued $235.0 million of 6.875% unsecured Senior Notes due November 15, 2011. In July 2010, we redeemed $11.0 million of the Notes. We expect to retire the remaining Notes with available cash in 2011.
We purchased U.S. Treasury and other debt securities during 2010 in order to earn a return on our excess cash and for the future payment of senior notes due in 2011. These are included as available-for-sale investments in our consolidated balance sheet. Investments include primarily corporate bonds, government agencies, government treasury bills, and government guaranteed bonds. We estimate the fair values of our investments based on quoted market prices.
The following is a summary of our cash flow from operating, investing and financing activities, as reflected in our consolidated statements of cash flows (in millions):
Cash provided by operating activities for 2010 increased by $80.6 million due primarily to a decrease in U.S. pension contributions of $54.0 million, an increase in net earnings of $83.6 million, including the effect of adjusting for non-cash items and offset by a decrease in cash required to fund changes in net operating assets and liabilities.
Cash provided by operating activities for 2009 increased by $93.8 million due primarily to improved collection efforts for customer receivables and timing of payments for expenses, particularly restructuring costs. We also received a refund of U.S. Federal income taxes of $66.0 million as a result of amending tax returns to deduct software costs in the periods incurred rather than capitalizing the costs for tax purposes. The above increases in cash provided by operating activities were partially offset by higher pension contributions, which increased by about $66.0 million.
Investing activities used cash of $504.4 million in 2010 compared to $1,138.8 million in 2009. The decrease in investing activities is attributable to the acquisition of Olympus in August 2009 and a decrease in capital expenditures for property, plant and equipment due to the completion of the Orange County consolidation project in 2010. These were partially offset by a net purchase of investments of $164.4 million and additional spending for new customer leased instruments during 2010.
Investing activities in 2009 used additional cash of $832.9 million compared to 2008. This increase is primarily related to the acquisition of Olympus for a purchase price, net of cash received, of $803.3 million on August 3, 2009 coupled with the $16.4 million acquisition of Cogenics on April 14, 2009. Additionally, there was an increase in payments for property, plant and equipment, due primarily to the Orange County consolidation project, offset by a decrease in spending for new customer leased instruments.
Financing activities used cash of $52.0 million in 2010 due primarily to our net debt repayments of $12.2 million, dividend payments of $51.1 million and stock repurchases of $92.9 million, offset by proceeds from issuance of stock totaling $99.9 million.
Cash flows provided by financing activities in 2009 increased by $865.2 million compared to 2008 due primarily to our $500.0 million debt offering completed in May 2009 and the $240.0 million equity offering completed in July 2009 to finance a portion of the Olympus acquisition, which closed on August 3, 2009.
Short and Long Financing Arrangements
At December 31, 2010, we had the following resources available to obtain short-term or long-term financings if we need additional liquidity:
Shelf Registration Statement
In November 2008, we renewed our universal shelf registration statement with the United States Securities and Exchange Commission for the offer and sale of up to $500 million of securities, which may include debt securities, preferred stock, common stock and warrants to purchase debt securities, common stock, preferred stock or depository shares. We have no immediate plans to offer or sell any securities.
We entered into an Amended and Restated Credit Agreement, dated December 28, 2009 (the Credit Facility), with a maturity date of May 2012. The Credit Facility provides us with a $350.0 million revolving line of credit, which may be increased in $50.0 million increments up to a maximum line of credit of $450.0 million. In connection with the Credit Facility, we incurred issuance costs of $5.3 million which are being amortized over the term of the Credit Facility. Interest on advances is determined using formulas specified in the agreement, generally, an approximation of LIBOR plus 2.25% to 2.875% margin with the precise margin determinable based on our long-term senior unsecured non-credit-enhanced debt rating. We also must pay a facility fee of 0.50% per annum on the aggregate average daily amount of each lenders commitment with the precise margin determinable based on our long-term senior unsecured non-credit-enhanced debt rating. At December 31, 2010 and 2009, no amounts were outstanding under the Credit Facility.
On February 17, 2011, Beckman Coulter, Inc. (the Company) entered into Waiver No. 1 to the Credit Facility pursuant to which the requisite lenders under the Credit Facility (i) permanently waived any event of default under the Credit Facility resulting from our entry into that certain Agreement and Plan of Merger, dated February 6, 2011 (the Merger Agreement), with Danaher Corporation (Danaher) and Djanet Acquisition Corp. (the Purchaser) and (ii) temporarily waived until the earlier of April 30, 2011 and the date of the consummation of the proposed merger with the Purchaser any event of default under the Credit Facility that may result from (i) any acquisition of less than 100% of our outstanding shares by the Purchaser or Danaher or (ii) any change in the composition of our board of directors.
At December 31, 2010, we also had $20.5 million of letters of credit outstanding with availability to issue an additional $10.3 million of letters of credit.
Uncommitted Lines of Credit
At December 31, 2010, $195.5 million of unused, uncommitted, short-term lines of credit were available to our subsidiaries outside the U. S. at various interest rates. Within the U.S., $40.0 million in unused, uncommitted, short-term lines of credit at prevailing market rates were available.
Our wholly owned subsidiary, Beckman Coulter Finance Company, LLC (BCFC), a Delaware limited liability company, entered into an accounts receivable securitization program with several financial institutions. The securitization facility is on a 364-day revolving basis. As part of the securitization program, we transferred our interest in a defined pool of accounts receivable to BCFC. In turn, BCFC sold an ownership interest in the underlying receivables to the multi-seller conduits administered by a third party bank. Sale of receivables under the program is accounted for as a secured borrowing. The assets of BCFC will be available first and foremost to satisfy the claims of the creditors of BCFC. The cost of funds under this program varies based on changes in interest rates. The term of the agreement extends to October 26, 2011 and the maximum borrowing amount is $125.0 million. We did not have any amounts drawn on the facility as of December 31, 2010 and 2009.
On February 15, 2011, the Company entered into a waiver for our securitization facility pursuant to which any amortization event under such facility resulting from our entry into the Merger Agreement was waived.
On May 18, 2009, we issued $250.0 million principal amount of the Companys 6% Senior Notes due 2015 and $250.0 million principal amount of the Companys 7% Senior Notes due 2019 (the Notes). In connection with the Notes, we incurred issuance costs of $4.8 million. The Notes were issued at a discount of $2.3 million which is being amortized over the estimated life of the Notes. The proceeds from the Notes were used on August 3, 2009 to partially fund the Olympus acquisition that is further described in Note 3, Acquisitions of the Notes to consolidated financial statements in Item 8 of this Form 10-K.
On May 19, 2009 we entered into forward sale agreements for the sale of an aggregate of 4,722,989 shares of our common stock including an amount equal to the underwriters over-allotment option in the public offering. The initial forward sale price was $50.75 per share which was equivalent to the public offering price of $53.00 less the underwriting discount of $2.25. On July 27, 2009 we received net proceeds of approximately $240 million from the issuance of shares in connection with this offering, which were used to partially fund the Olympus acquisition. Additionally, we incurred issuance costs of $11.8 million in connection with this offering, which is recorded as a reduction to additional paid-in capital.
In December 2006, we issued $600.0 million aggregate principal amount of 2.5% unsecured convertible senior notes due 2036 (the Convertible Notes). In connection with the proposed transaction with Danaher, the conversion feature of the Convertible Notes gives the holders certain rights to convert their investment into cash and, if applicable, shares of common stock in accordance with the terms of the indenture. As a result, the Convertible Notes are expected to be classified as current maturities of long-term debt in the first quarter of 2011. With respect to any Convertible Notes that are converted, we expect to use our available cash and resources of credit to fund any cash settlement obligation that becomes due prior to the consummation of the pending transaction with Danaher. See Note 21, Subsequent Events, of the Notes to consolidated financial statements in Item 8 of this Form 10-K.
Certain of our borrowing agreements contain covenants that we must comply with, for example, a debt to earnings ratio and a minimum interest coverage ratio. At December 31, 2010, we were in compliance with all such covenants as well as reporting requirements related to these covenants.
The following is included in long-term debt at December 31, 2010 and 2009 (dollar amounts in millions):
The cost of any future indebtedness, including future filings under our credit facility, may be affected by our credit rating. Our credit ratings at December 31, 2010, were as follows:
Factors that can affect our credit ratings include changes in our prospects, our operating performance, our financial position and our business strategy. If a downgrade were to occur, it could adversely impact, among other things, our future borrowing costs and access to capital markets.
Based upon current levels of operations and expected future growth, we believe our cash flows from operations together with available borrowings under our Credit Facility and other sources of liquidity will be adequate to meet our anticipated requirements for interest payments and other debt service obligations, working capital, capital expenditures, lease payments, pension contributions and other operating and investing needs.
Customer leased instruments normally comprise about two-thirds of our total capital expenditures We expect our OTL instrument balance to increase as the majority of our contracts are from OTL transactions. We expect to incur capital expenditures of about $289 million in 2011. Capital expenditures are funded through cash provided by operating activities, as well as available cash and cash equivalents and short-term investments.
Off-Balance Sheet Arrangements and Contractual Obligations
We do not have any off-balance sheet arrangements that have had or are reasonably likely to have a current or future material effect on our financial condition, results of operations or liquidity.
The following represents a summary of our contractual obligations and commitments as of December 31, 2010 (in millions):
Recent Accounting Developments
See Note 1 Nature of Business and Summary of Significant Accounting Policies of the Notes to consolidated financial statements included in Item 8 of this Form 10-K for a description of recently issued accounting pronouncements, including the expected dates of adoption and estimated effects on our results of operations, financial position, and cash flows.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The following information about potential effects of changes in currency exchange and interest rates is based on a sensitivity analysis, which models the effects of fluctuations in currency exchange rates and interest rates. This analysis is constrained by several factors, including the following:
Although the results of the analysis may be useful as a benchmark, they should not be viewed as forecasts.
Our most significant foreign currency exposures relate to the Euro, Japanese Yen, Australian dollar, British Pound Sterling and Canadian dollar. As of December 31, 2010 and 2009, the notional amounts of all derivative foreign exchange contracts were $483.1 million and $546.3 million, respectively. Notional amounts are stated in U.S. dollar equivalents at the spot exchange rate at the respective dates. The net fair values of all derivative foreign exchange contracts as of December 31, 2010 and 2009, resulted in the recognition of net assets of $2.8 million and $2.0 million, respectively. We estimated the sensitivity of the fair value of all derivative foreign exchange contracts to a hypothetical 10% strengthening and 10% weakening of the spot exchange rates for the U.S. dollar against the foreign currencies at December 31, 2010. The analysis showed that a 10% strengthening of the U.S. dollar would result in a gain from a fair value change of $18.4 million and a 10% weakening of the U.S. dollar would result in a loss from a fair value change of $16.5 million in these instruments. Losses and gains on the underlying transactions being hedged would largely offset any gains and losses on the fair value of the derivative contracts. These offsetting gains and losses are not reflected in the above analysis.
Similarly, we performed a sensitivity analysis on our variable rate debt instruments and derivatives. A one percentage point increase or decrease in interest rates was estimated to have no impact on our pre-tax earnings based on the amount of variable rate debt outstanding at December 31, 2010.
Additional information with respect to our foreign currency and interest rate exposures are discussed in Note 11 Derivatives of the Notes to consolidated financial statements in Item 8 of this Form 10-K.
Financial Risk Management
Our risk management program, developed by senior management and approved by the Board of Directors, seeks to minimize the potentially negative effects of changes in foreign exchange rates and interest rates on the results of operations. Our primary exposures to fluctuations in the financial markets are to changes in foreign exchange rates and interest rates.
Foreign exchange risk arises because our reporting currency is the U.S. dollar and we generate approximately 54% of our revenue in various foreign currencies. U.S. dollar-denominated costs and expenses as a percentage of total operating costs and expenses are much greater than U.S. dollar-denominated revenue as a percentage of total net revenue. As a result, appreciation of the U.S. dollar against our major trading currencies has a negative impact on our results of operations, and depreciation of the U.S. dollar against such currencies has a positive impact. We seek to minimize our exposure to changes in exchange rates by denominating costs and expenses in foreign currencies. When these opportunities are exhausted, we use derivative financial instruments to function as hedges. We use forward contracts and purchased option contracts to hedge certain foreign currency denominated transactions based on prior year rates. We do not use these instruments for speculative or trading purposes. The major currencies against which we hedge are the Euro, Japanese Yen, Australian dollar, British Pound Sterling and Canadian dollar.
We do not have significant exposure to interest rate risk since our long-term debt is nearly all fixed.
We continually monitor inflation and the effects of changing prices. Inflation increases the cost of goods and services used. Competitive and regulatory conditions in many markets restrict our ability to fully recover the higher costs of acquired goods and services through price increases. We attempt to mitigate the impact of inflation by implementing continuous process improvement solutions to enhance productivity and efficiency and, as a result, lower costs and operating expenses. The effects of inflation have, in our opinion, been managed appropriately and as a result have not had a material impact on our operations and the resulting financial position or liquidity.
Item 8. Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Beckman Coulter, Inc.:
We have audited the accompanying consolidated balance sheets of Beckman Coulter, Inc. and subsidiaries (the Company) as of December 31, 2010 and 2009, and the related consolidated statements of earnings, stockholders equity and comprehensive income (loss), and cash flows for each of the years in the three-year period ended December 31, 2010. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule of valuation and qualifying accounts as listed in the index under Item 15(a)(3). These consolidated financial statements and financial statement schedule are the responsibility of the Companys management. Our responsibility is to express an opinion on these consolidated financial statements and related financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2010 and 2009, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2010, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for business combinations due to the adoption of a new accounting pronouncement in 2009.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Companys internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 23, 2011, expressed an unqualified opinion on the effectiveness of the Companys internal control over financial reporting.
/s/ KPMG LLP
February 23, 2011
Consolidated Balance Sheets
(in millions, except amounts per share)
See accompanying notes to consolidated financial statements.
Consolidated Statements of Earnings
(in millions, except amounts per share)
See accompanying notes to consolidated financial statements.
Consolidated Statements of Stockholders Equity and Comprehensive Income (Loss)